Head into the new
without that credit card debt
the new millennium here, it's time to get rid of that credit card
debt once and for all.
It won't be quick. It won't be easy. But it
can be done.
"It's day after day, month after month. There's
no quick fix. It's hard," says Ruth L. Hayden, a financial educator
and author of How to Turn Your Money Life Around.
"It's like a tunnel. You just have to go through
Once through, you can celebrate with a personal
declaration of financial independence. You've broken free from the
cycle of debt. The days of depending on those little plastic cards
to make your life go are over.
"And then the real fun starts," Hayden says.
Let's assume your goal is to build up a $6,000
nest egg in two years by socking away about $250 a month. If you're
starting out deep in debt, you've got to make some tough choices
about where you're going to shovel that money -- toward building
a mountain of cash or toward filling that financial hole.
Here are the cold, hard numbers: Someone who
has a $6,000 credit card debt and pays 15.49 percent interest --
the Bankrate.com national average for a standard card -- would
need 30 months to completely pay it off at $250 a month. And if
that someone wanted to build a $2,000 nest egg first before attacking
the credit card debt wholeheartedly, it would take even longer.
By paying the monthly minimum of $120 to the credit card company
and applying the remaining $130 to the nest-egg fund, it would take
18 months to build up the $2,000 savings and another 25 after that
to pay off the debt.
Assess the damage
No matter which route you take, the time to start is now. Step one
is assessing the damage. Take stock of your assets and liabilities.
"Find out where you are," says Joy Thormodsgard,
senior vice president at the National
Foundation for Consumer Credit. "You're looking at where you
owe and what you owe and you're looking at credit."
- List all creditors, noting balances, credit
lines, interest rates and monthly payments.
- Track expenses. How much money comes in and
how much goes out each month? Where's it going and why? Are there
places you can scale back spending and free up more money for
paying down card debt? "You have to aggressively dig into those
debts," says Meg
Green, a certified financial planner in Miami. "If it means
pulling in your belt, do it."
- Stop charging up those credit cards. Pay
with cash or debit cards. If you must pay with a credit
card make sure you can pay off that new charge that very month.
Thormodsgard suggests waiting 24 hours before
making a credit card purchase. "Give yourself a 24-hour cooling-down
period," she says. "Revisit your goals and decide if it's as important
as you thought it was when you first saw it in the store. Sometimes,
it's good to bounce it off someone else."
Lots of people end up overspending simply because
they don't pay close attention to their finances. Renee Rupe, education
director at Consumer
Credit Counseling Service of Greater Denver, suggests carrying
an index card in your checkbook to help keep you on track. On the
card, write how much goes to savings, how much for groceries, how
much to debt and so on.
"We call it being conscious of all of your money
all of the time," Rupe says.
two: Pick a pay-down strategy
As for paying down the card balances you do have, zero in on one
card at a time. Pay $25, $50, $100, or whatever you can spare on
top of the minimum payment. Minimize interest costs by transferring
balances to the card with the lowest interest rate.
From a dollars-and-cents standpoint, it makes
the most sense to pay down the card with the highest interest rate
first. Some consumer experts, however, urge people to attack the
card with the smallest balance first because it can help get the
ball rolling and keep it rolling. Once that first balance is paid
off, focus on the card with the next smallest balance and so on.
"You have a relatively quick sense of accomplishment
and that feeds into your future success," says Vickie Hampton, associate
professor of personal finance at the University of Texas at Austin.
Close all empty credit card accounts -- that
way, you won't be tempted to spend. The aim is to get down to one
or two credit cards and stay there.
Don't forget to make room in your budget for
periodic expenses such as car maintenance, home repairs and medical
bills. These expenses are inevitable. Cars, houses and even bodies
break down from time to time.
"I call them the 'have-tos', nonmonthly 'have-tos.'
If you're going to have those things, you have to be willing to
budget a certain amount of money to them each month," Hayden says.
"You have to get serious here. Can you afford
your life? Can you afford your car? Can you afford the commitments
you take on? It's not just monthly payments."
If you don't have some cash stashed away, chances
are you'll end up charging up that credit card again. Months of
chipping away at debt can be negated in one swipe of the card.
and don'ts for getting
rid of credit card debt
- Stop charging
- Transfer balances to the credit card with the lowest interest
- Close out any empty card lines
- Pay more than the minimum payment
- Reward yourself for making progress
- Decrease your payment when your minimum monthly payment
- Be late. Late fees are steep. Mail payments at least one
week before the due date
- Fall deeper into debt by opening new card accounts
- Accept card line increases you don't need
- Give up
"It's demoralizing," Hayden says. "Without savings,
people go in and out of debt and never get out."
Ideally, every family should be able to get
their hands on three- to six-months' salary -- but a $2,000 to $3,000
cushion is better than nothing.
While all consumer experts believe building
up an emergency fund is a good idea, they can't agree on where it
should fit into a debt reduction strategy.
Some financial experts chafe at the very thought
of tucking money into a low-interest savings account when there's
a mountain of credit card debt growing at 18 percent interest. They
say pay off the card debt first and worry about savings later.
Others, such as Hayden, recommend building up
savings before starting in on the card debt. Still others suggest
building up savings and knocking down card debt simultaneously.
"I don't think there's a right answer. Mathematically
there may be a right answer but that might not be the right answer
for an individual," Hampton says. "If they want to reduce finance
charges as much as possible, they'll pay off as much debt as possible."
If you're strapped for cash, you may want to
pay down a couple of cards with low balances. Then split the money
that was going toward those monthly payments between savings and
other card debt.
three: Stick with it
Look at your finances and decide what's going to work for you
and what kind of pay-down plan you can stick to.
"It shouldn't be so painful that it's a drudgery,"
Rupe says. "That's the biggest challenge."
Hampton adds, "You don't want to keep yourself
on too tight of a budget or you'll rebel. You'll have a little temper
If you're having trouble starting or sticking
with a debt-reduction plan, you may want to visit a credit counselor.
Let an expert take a good long look at your finances and crunch
Then start anew and commit to the plan. Lots
of folks start off strong and give up after a few months. Set shorter-term
goals and reward yourself when you've achieved them.
Celebrate when each account is paid off with
a bill-burning or card-cutting ceremony. Involve the whole family.
"Have a celebration -- a little party with cake
and ice cream and everything," Rupe says.
Made it to the halfway point? Splurge with dinner
"It's tough stuff. You have to bring a little
fun into it," Green says.
Stay focused. Think of all the things you'll
be able to do with your money when that card debt is gone. It could
be a vacation, a new stereo, or longer-term goals such as moving
into a new home or paying for a child's education.
If that's not enough of an incentive, just think
of the relief. There's a kind of post-debt euphoria that comes at
the moment you stand up after clawing your way out from under a
mountain of bills.
Rupe sees it all the time with CCCS clients
who have graduated from a debt-management plan.
"In the end they all say, 'I'm free.' "
-- Posted: Jan. 6, 2000