by Gary Foreman

Dear Dollar Stretcher,
My husband and I have two major credit cards with interest of 23.9%. Our credit is not very good and we cannot get a lower interest card to pay these off. Every month we pay $275 in interest alone on just these two bills. Do you have any advice as to how we can get out from under this debt?

With the holiday credit card bills coming in, Linda is probably not alone. Americans currently have over $1 trillion in consumer debt. About half of that is owed to credit card companies. And about 5% of all accounts are 30 days or more past due with their payments.

Let's begin with the interest charges. Based on the $275 that Linda's paying in interest each month, the debt is more than $13,800.

The banks that issued the cards to Linda are glad that she's in debt. They charge her 23.9% to borrow the money. They're paying depositors less than 6% on certificates of deposit. So there's nearly an 18% profit on the money that she has borrowed.

Linda is paying a high rate due to her credit history. That high rate is a warning sign for her that we'll explain later.

To further complicate the problem, Linda is trapped: she is just paying the interest on the debt each month, and may not even be touching the principal. Again, she's not alone. The average American consumer is paying off about 14% of an outstanding balance each month. That leaves 86% to keep accruing interest charges. At this rate Linda will be repaying these debts forever!

What options are available to Linda? She's already tried the most popular one: transferring the balance to a lower-rate account. And as Linda points out, with bad credit it's hard to find a credit card that's willing to give a lower rate. That doesn't mean that Linda should quit looking. If she has internet access, she might want to check out They compare credit card rates on a regular basis.

Linda should also try calling the two credit card companies and asking for a lower rate. She'll probably be turned down, but a phone call could pay big dividends.

The next option for Linda would be to consolidate the debt against a fixed asset. A home equity loan would be the most likely candidate. Currently you can borrow money against your home for about 9%. Naturally, there's some risk involved. If Linda doesn't keep up with the payments, she could be putting her house in jeopardy.

Another possibility could be her retirement plans. Some 401k plans will allow you to borrow against your account. The rules vary, so you'll need to ask your plan administrator. A loan means that you're paying yourself the interest. Sounds like a good deal, but you need to know about the potential pitfalls. Some plans will not allow you to continue making contributions while you have a loan outstanding. Others can require you to pay back the entire loan if you leave your employer. A layoff could make that hard to do.

If none of those options work, it starts getting a bit tougher. Then the challenge is how to pay more than the minimum each month. It's something that none of us wants to think about - paying for things that have long since been consumed or broken. But remember, when we use our credit cards, we make a promise to repay in the future.

In Linda's case it means that for every $100 that she charged last year, she's paying $1.99 each and every month until she finds the money to pay back the money she owes. While the item sits in the closet and is worth less each month, the price you pay for it goes up each month!

There's really only three solutions at this point. The least painful one is to pay more than the interest each month. Somewhere Linda needs to find $50 or $100 each month that she can send the credit card company to reduce the outstanding balance. Perhaps it's time to give up the cable TV or cell phone, or find a part-time second job. It will require a sacrifice. But the alternative is to continue to spend $275 each month and get nothing in return.

If Linda doesn't start reducing the debt now, it's likely that she'll begin to fall behind in her bills. Generally when the credit card companies raise the rates to 20% or more, they've identified the borrower as someone who could start falling behind in their payments. A statistical model is used to help them predict who will have trouble. While it's not foolproof, on average they're right. And that should have Linda scared. It means that she's starting to skate on thin ice. If she starts to fall behind she'll want to consider contacting a non-profit credit counseling agency. Most work along similar lines. They'll attempt to negotiate a lower rate with the lenders. The borrower will be expected to cut up their credit cards and commit to making the new monthly payments until the debt is repaid. Usually the borrower sends one check to the counseling agency. Then they send checks to the individual lenders.

Failure to continue to successfully make the payments will usually leave the borrower little choice but to file for bankruptcy. And about 1.2 million people have taken that trip this past year. For some people, bankruptcy seems like a relief: no more fighting to make payments or cover late charges. But there is a stiff price. The bankruptcy will show on your credit report for a decade. It will be very difficult to borrow money for a car or home. Some people even have trouble getting a new job, because the information is available to potential employers.

Hopefully Linda will find a relatively painless way to repay the debt. One thing for all of us to remember is that it's easier to repay credit card balances when they are small and the interest rate is low. When the balance balloons and the lenders raise the interest rate, it becomes increasingly difficult to accomplish the task.

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.

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