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Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

How do I get rid of credit card debt?

Dear Dollar Diva,
How do I get rid of credit card debt?

Shedding credit card debt is like shedding pounds: you set up a plan, and take it one day at a time. The Diva's "payment push" strategy, described later, will help you get out of debt quickly. But first, here are some things you need to know before you get started.

The head game
Getting out of debt is a head game. Your brain needs to be enraged at the banks' tactics; their high interest rates, one-sided contracts, punitive fees and easy credit, especially just before Christmas and April 15th. Read the Diva's take on this in "Credit card company tactics" and "How do I deal with credit card company dirty tricks?"

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Then you need to turn the rage inward. Get mad as hell that you let yourself get seduced by easy credit and vow that you will do everything in your power to get out of debt, and stay out of debt forever.

To reach that goal, you need to understand what possessed you to take on all that debt in the first place. Suze Orman's book, 9 Steps to Financial Freedom: Practical and Spiritual Steps So You Can Stop Worrying, will help you get in touch with your feelings about money, and how those feelings impact your spending habits.

Debt is the problem, not the solution
Taking on new debt to get rid of old debt is a fool's game. Folks with spending problems should not suck money out of their houses or retirement plans to pay off credit card debt; they usually end up worse off than when they started.

Don't count yourself out here: If you have credit card debt that you can't pay off, you have a spending problem. The first promise you need to make to yourself is: "I will not incur any new debt"; i.e. no more credit card charges and no new loans.

Put all credit cards in an inconvenient place, and never carry plastic on your person. You want to pay them off and kiss them all goodbye. You can keep one on hand for convenience or emergencies, but it must be paid in full at the end of each month.

Try to get your interest rate reduced
Getting a lower interest rate is not the easiest thing in the world, but you owe it to yourself to try.

What's coming in and what's going out
Before you can embark on the Diva's "payment push" strategy, you need to know what comes in and what goes out each month. If you're panicking because it sounds too much like the "B" word, calm down and call it something else, like a spending plan, or cash-flow report. For help in putting this together, read The Diva's "What is a budget?"

Tighten that belt
Once you see where your money's going, take out the cleaver and start chopping. The stronger your commitment to get out of debt, the less painful this will be. For each category, ask yourself if that expense is worth being a slave to the banks. You're the master here: the more you cut, the faster you're out of bondage.

If gourmet coffee, magazine subscriptions, clothes you don't need, dinners out, gifts and trips are more important to you than being debt free, you're head's not in the right place for the job ahead. If you have a ton of debt, and more debt seems like the only way out, contact Debtors Anonymous. You'll find plenty of company, and I hope, the help you need to get out of debt.

Diva's "payment push" strategy
Once you know how much cash your belt tightening will free up to pay down the debt, you're ready to apply the "payment push" strategy. Here's how it works.

You continue to make the payments you are currently making on your debts. Each month, the debt with the highest interest rate gets the "payment push" of money saved from belt tightening, plus any additional cash that comes in from raises, tax refunds, or a windfall.

As soon as the debt with the highest interest rate is paid off, the "payment push" goes to the debt with the next highest interest rate. And so on and so forth until they all fall down and go boom.

Here's an example of a debt schedule with a target date for becoming debt-free by September 2002:

Sample debt-repayment schedule
Balance Due
Interest Rate
Payment push period
How to hit target **
May 2001-July 2001
-- Current payment
-- Belt-tightening amount
-- Tax refund
Aug. 2001-Nov. 2001
- Current payment
- Extra cash when MasterCard is paid off
- Raise
Dec. 2001-Sept. 2002
- Current payment
- Extra payments when Visa is paid off
- Bonus

To see a real-life debt-payment schedule, go to the Diva's Money Makeover "Digging out of a financial hole."

Minimum monthly payments
If you want to be in debt forever, make minimum monthly payments on your credit cards. These payment are designed to give banks an enormous payoff, while keeping you shackled to debt for decades. That's because minimum payments tend to cover the monthly interest and just a speck of principal.

For example, suppose you are the humble owner of the following credit card debt:

· Balance: $15,000
· Interest rate: 20%
· Minimum monthly payment: 2-1/2%
· This month's minimum monthly payment: $375
· Next month's minimum monthly payment $372 (it goes down a little each month)

How long will it take to pay this debt off if you just make the minimum payment each month, and how much interest will you fork over?

· It will take you almost 42 years to pay off the debt.
· It will cost a whopping $29,500 in interest.

What happens if you tighten your belt so you can pay $500 a month on that same debt? You're debt free in three and a half years, and only out-of-pocket $6,000 for interest.

Do yourself a favor. Use Bankrate.com's calculator "The true cost of paying the minimum" to calculate what it's costing you to make minimum payments on your credit card debt, and see how much you'll save by making fixed monthly payments. The Diva thinks you'll find living like an ascetic for a couple of years an attractive alternative to living in debt.

-- Posted: April 16, 2001

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