Dear Debt Adviser,
We have six credit cards with limits from $500 to $3,500. They are all maxed with an APR of 28 percent. Where do we begin to get out of this mess? I need help making some kind of a plan that is going to get us out in one year.
-- Cam Carder
Dear Cam,
The fact that you recognize the mess you are in and that you need help is positive. There are many reasons you, and millions of other people, find yourselves in this situation. The trick is to identify what you are doing wrong and correct that behavior. This, along with an aggressive repayment schedule, will do the trick.
First, stop using credit! You may think this is a no-brainer, but you need to step back and make this decision so that as soon as a card has a few dollars of available credit you don't charge it back up again. To protect your credit score you shouldn't cancel your cards, but you need to do whatever it takes to keep them out of the path of credit temptation. Cut them up. Freeze them in a block of ice.
Then, you and your significant other should agree on some goals, both long- and short-term. You already have one short-term goal, which is to get out of debt in one year. This may or may not be an attainable goal in the time you want. What I can tell you is that in one year you can make a big difference. How big a difference will be up to you and what you are willing to do. If you are really serious about being out of debt in a year, a second job or overtime -- if available -- may be in your future. Bankrate's calculator, " What will it take to pay off your credit card" can help you see what it will require.
If your problem is overspending, or living beyond your means, a useful exercise is to track expenses for a month, down to the penny. This will allow you to "find" money you can put toward paying off your debt. For instance, how often do you really watch all the channels the premium package offers on your cable? What about extra telephone services or the daily newspaper subscription? Can you brown-bag your lunch and start clipping and using coupons? One of my favorite ways to save is to check out the local library. Free books, free movies and free membership, too -- that's enough to warm the Debt Adviser's heart! Little things do add up, and you may be surprised what you are able to squeeze out.
If your problem stems from unexpected expenses -- for instance, your car broke down and needed expensive repairs or you had to replace your water heater -- you need to establish an emergency savings cushion. I know it is unrealistic in the short term for you to save the recommended three to six months' living expenses, but you can start small. Saving even a few dollars a week will add up and, more importantly, will start a habit that you won't want to break. Once you are out of the mess you are in now, work toward achieving the three- to six-month goal. Then when life happens, as it does, and you are faced with an unexpected expense, you will have your savings -- and not your credit cards -- to fall back on.
You will notice that I didn't recommend that you look for a low-interest credit card offer and transfer balances, or use home equity to make the debt disappear. I believe your problem is more fundamental and you need to get back to the basics of spending less than you earn and saving some money.