 Jump off the medium income, high debt treadmill
|  Dear
Debt Adviser,
I am in a lot of debt. I make $40,000 a year and have $16,000 in unsecured debt. I am slowly trying to pay off credit cards and then close them. I tend to find myself making large payments on the credit cards, but then needing to use them because I don't have enough cash on hand. I know I need to pay them off, but using them again because I need them is defeating my purpose. What should I do?
-- Elaine
 Dear
Elaine,
You are truly a lady on a mission! First, let me congratulate you on your resolve to pay off your credit card debt. I hear the frustration in your letter and believe I can help.
You are doing most things right in your efforts to pay off your
debt. From what you have written, it seems you do not have a firm
grasp on your total monthly expenses. The result is that you pay
more than you can actually afford toward your card balances only
to have to cover the shortfall later. That is where you need
to start.
You can put together a budget,
which is always a good exercise, or in your case you might try a
shortcut as you seem to be more mistiming expenses rather than overspending.
Here's the plan: For two months, pay your normal expenses and
only pay the minimum
payments on your cards. Save all the money leftover from your
paychecks in a separate account if you have one, or record the balance
separately from the rest of your money in your check register. Now
you can clearly see what you can afford to pay on your cards beyond
the minimum.
If there is little or no money accumulating in your
separate account, then you will need to take a hard look at what
you purchased and decide if those purchases are more important to
you than paying off your debt. Whatever you decide, you will need
to act accordingly. In either case I suggest you stop spending,
using the cards, and use cash, checks or debit cards as much as
possible.
Each of us defines progress differently. Here
are two suggestions to consider. Put most of your available
money each month toward the lowest balance card and pay it off quickly.
You will see progress as the number of cards with balances goes
down. Or choose the card with the highest interest rate, regardless
of balance, and pay it off first. You will see your interest rate
savings accrue over time and more and more money will go to principal
payments. A Bankrate feature called "Debt
payment push" and the accompanying debt
payment work sheet explain further.
Whichever method you choose, make sure you pay at least the minimum due on your other cards if you decide to put the majority of your money toward one card. Once the cards are paid off, be sure to put a chunk of the money you had been using to pay down your balances into building a balance in an emergency savings account!
A final suggestion is to not close the cards once
you have paid them off. You will negatively impact your credit score
if you close accounts, especially if they are old ones. But, don't
spend with them either!
Once you have a better handle on your actual monthly expenses, paying off your debt will go much smoother. However, don't beat yourself up if you have an unexpected expense for which you need to use your credit cards. As long as you move forward and are committed to paying off the debt, a small occasional addition to your balances will not affect your goal of paying off all credit card debt that much.
Good luck!
The Debt Adviser, Steve Bucci,
is the president of Money Management International
Financial Education Foundation and the author of
"Credit
Repair Kit for Dummies." Visit MMI
for additional debt advice or to ask a question
of the Debt Adviser go to the "Ask
the Experts" page and select "debt"
as the topic.
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