||Ask the Dollar Diva
How do I get rid of credit card
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
card company tactics" and "How
do I deal with credit card company dirty tricks?"
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
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
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"
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:
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
Dec. 2001-Sept. 2002
- Current payment
- Extra payments when Visa is paid off
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:
· Interest rate: 20%
· Minimum monthly payment:
· This month's minimum monthly
· 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
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