debt

3 steps to stymie a personal credit crisis

Steve BucciQuestionDear Debt Adviser,
I have several credit cards on programs where the companies debit my checking account monthly. The companies have decreased the interest rates on the cards as long as they can keep collecting payments in this manner. The problem is, this month my husband's income dropped severely and I don't have enough money for the credit card companies.

How should I handle this? In the past they said any missed payment would terminate the program. I don't have enough money. I can barely feed my family. Next month he will return to receiving a regular paycheck. The problem has been that our expenses are higher than his income. Do you have any suggestions?
-- Jolene

AnswerDear Jolene,
I know how upset you must feel. You are caught in a trap that gets worse with every minor setback and you can't see a way out. So you worry -- about everything.

Here are three steps that, taken together, can help you break free of this vicious circle. First, I want you to get a professional to look at your budget. Second, communicate with your creditors as soon as possible. Third, force yourself to save.

With the first step, start by sitting down with your husband and honestly discussing your monthly spending. If you consistently spend more than you earn, you are digging a deep financial hole that you'll never get out of. You must find ways to cut spending and/or increase income. Call or visit a reputable nonprofit credit counseling agency. They will help you put together a bare-bones budget for free. Begin your search by looking at the websites of the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.

Also, be sure to look at your payroll deductions. You can reduce your withholding to free up some cash if you tend to get big tax refunds every year.

If reducing expenses isn't enough to balance your budget, look at increasing income. You may need to consider returning to work if you are currently at home, or request additional hours if you have a job. If you and your husband are working, one of you may need to find a second part-time job.

Second, contact your credit card companies. Tell them you are facing a temporary financial crisis due to an unexpected decrease in your income and that you have been to a credit counselor for help. Tell them you can only afford "x" amount from your checking account this month. Do this as soon as possible, before the scheduled debit if possible. Stress that it is for one month only and you will be able to resume the program the next month. It's up to the creditors if you can skip one payment and remain with the program, however.

If you have been on the program for six months or more without problems, the creditors may be sympathetic. If they are unwilling to keep you on the program, at least your interest rate shouldn't jump to the default rate. Due to the Credit Card Accountability, Responsibility and Disclosure Act, or the Credit CARD Act, you can only be charged the default rate if a payment is more than 60 days late. But your rate may rise to what it was before you entered the automatic debiting program. In that case, go back to the credit counselor and ask about a debt management plan.

Third, you must set a goal of saving something every paycheck. It can be as little as $5 -- I don't care. But you have to get in the habit of saving. Increase the amount whenever you can. Without savings, you'll never get out of this mess and you will worry yourself sick. What you don't want to do is to continue spending tomorrow's income today, not knowing if the money for repayment will be there.

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