Head into the new millennium
without that credit card debt
By Lucy Lazarony • Bankrate.com

With 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 it."

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.

Step one: 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.

Step 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.

"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.

Step 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 tantrum."

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 the numbers.

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 out.

"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