Posted on 01/04/2012 7:39:40 AM PST by Kaslin
Dear Carrie: Please help. I'm determined to get out from under my credit card debt this year, but don't know how to get started. I'm currently earning $50,000 a year as an administrative assistant, but I owe $20,000 on my three cards. I'm afraid I'll never get on top of it! --A Reader
Dear Reader: Just by asking for some advice, you've taken a vital first step towards getting on top of your credit card debt -- so congratulations for taking control. I won't sugarcoat your challenge: This won't be easy, and it will almost certainly take you longer than a year. You'll need your determination and some discipline. So let's get to work.
FIRST: STOP USING YOUR CARDS
At the risk of sounding obvious: Stop using your cards, and use cash or checks instead. Not only will this slow down the growth of your debt, it should help curb your spending in general. Most people find they spend less if they pay by cash or check. (I don't recommend getting rid of your credit cards entirely; in today's world, you need at least one or two. Just use them out of necessity, not convenience.)
SECOND: MAKE A BUDGET
Next, figure out how much you can devote to paying down your existing balances each month. Start by creating a realistic budget. You might put expenses into two broad categories: your basic fixed costs, including rent or mortgage payments, car payments, utilities and groceries, and discretionary expenses, such as eating out, travel, clothes and entertainment. If you want to get really serious about reducing your debt, you might try to change your fixed expenses (move to a cheaper living situation, for example), but probably most of your free cash will come from reducing discretionary spending.
THIRD: DON'T FORGO SAVINGS
Your budget should also include savings. I know your priority is to reduce debt -- as it should be. But make savings a part of your budget now, even while you still carry balances on your cards. Having money in the bank is invaluable for emergencies and is psychologically reassuring.
I'd set two savings goals for now: an emergency fund of three to six months' worth of expenses in case something truly horrible happens, like you can't work for a few months and some retirement investing, preferably through an automatic payroll deduction into a tax-advantaged 401(k) plan. This should be at least enough to capture an employer match.
FOURTH: DECIDE WHICH CARDS TO PAY OFF FIRST
It makes sense to pay off the highest rate cards first, obviously, so make sure you understand the terms for each of your cards. You might also see if it's possible to consolidate one or more balances onto another lower rate card. Card companies routinely offer the chance to transfer balances, sometimes with very low teaser rates, which could result in real savings in terms of your total interest expense and could also accelerate your progress in becoming debt free. (If you do a balance transfer, take note of any fees that might be imposed.)
FIFTH: COMMIT TO A PAYOFF SCHEDULE
Now you can start to pay off your card debt in earnest -- and efficiently. Say you had $600 a month for paying credit card debt. Pay the minimum payments for the two lower-rate cards and apply the rest to the highest-rate card. When that one's paid off, move to the next highest rate card. Here's a link to one of several online calculators that will tell you how many months it will take to pay down your debts: http://bit.ly/wZk1zj. I'm sure you know this, but it's so important I feel compelled to mention it: Make sure you always pay at least the minimum and never be late. Credit card companies can impose substantial fees on late payments, and you could damage your credit rating.
Getting out of credit card debt is one of the more daunting financial challenges, and some people understandably feel overwhelmed. You said you were "determined" to deal with this, and that's exactly the kind of attitude you'll need to get to the position of being debt-free. Good luck!
I won't mention the bank name, but I'm sure they have monkeys on at least some of their keyboards.
If you use an underwriter, then you will deal with thinking people.
This one went to review by an underwriter, and the answer was the same. She went to another bank (where I have been a customer for many years), and got a loan with no problem.
You to be careful about using a debit card in some cases, especially when traveling.
Some hotels will put a hold on additional funds when you check in, above and beyond the nightly rate. It's to cover any potential losses if you abscond with the towels, etc. Not all do it, and they aren't always upfront about it. If you aren't careful, it will lock up funds you were expecting to use, or even tip you over into a negative balance.
The large rental car agencies don't accept debit cards at all, at least at reservation time. When you pick up the car, they put a hold on a significant amount to cover any damages when you return, and release it afterwards. However, they will allow you to rent a car with a credit card, then pay for it when you return with a different debit card.
There's nothing evil about credit cards if you use them wisely. I haven't paid any credit card interest for about 20 years, because I pay them in full every month. I only have an annual fee on one of them, but I get a benefit in return that is worth about twice the annual fee.
I forgot this, and didn't see your response until now.
And it's one of the most important considerations. You can avoid paying it back if you lose your job, but then it becomes a withdrawal. And, the withdrawal is subject to income taxes and withdrawal penalties.
Don't borrow from a 401(k) unless you have no other choice. I would rank it just above withdrawing funds from a 401(k) in order of preference.
I haven't read the fine print lately, but I think that 401(k) withdrawals are only permitted for hardship circumstances, and some plans require you to exhaust the option of borrowing first.
http://www.loansafe.org/forum/debt-settlement/
Don’t attempt unless you’re willing to have bad credit for a good five years....
Thanks for the ping.
I read this earlier today and shook my head.
Step 1 - Stop spending money you don’t absolutely have to spend. That’s a lot smaller amount than people think it is.
Smart.
It makes me a little ill reading some of the comments from conservatives on the necessity of personal debt (”but I get 2% cash back!”). I’m not going to check past posts to see if these same Freepers are complaining about government deficits, but I suspect some have.
We’ve been working the Total Money Makeover since late 2009 and will be debt free but the house next year. The house should be paid off 5-6 years after that.
I will never again owe a dime to a bank EVER.
$32,000 in credit card debt.....http://video.foxbusiness.com/v/1338417628001/using-uncommon-sense-to-transform-your-finances/
A second job is a great suggestion. If you’re working you’re not shopping.
Dave Ramsey’s column is on a different thread. I know, because I posted it
“We’ve been working the Total Money Makeover since late 2009”
I will hit my 5 year anny next month....
” and will be debt free but the house next year.”
You will love the peace that it brings to your life. However, be warned, for me there was a bit of a lull. I found that I was so excited watching the debt decrease that somehow I was not getting that same excitement watching my savings grow. It took a few months and finally the same level of excitement returned.
“The house should be paid off 5-6 years after that.”
I’m on pace to only have 21 more months. It is almost time for me to start planning my mortgage burning party.
;-)
Where is it? If you ping me to it, I’ll ping the group.
Hmmm, maybe you are referring to another thread?
I did a quick check, and didn't see anyone advocating personal debt. But maybe I missed one.
Personal credit is a lot different from debt. Using credit responsibly can make life much simpler, and profitable.
For instance, we use credit card rewards to effectively discount every purchase by 1%. We have no debt, because we pay off the credit cards -- in full -- every month.
The interest rate doesn't matter, because we don't pay any. We pay no annual fees, except on one that gives me a free benefit every year that is worth up to double the annual fee.
Is there a temptation to over-spend? Sure. But, a little self-discipline goes a long way. Applications like Quicken to manage your personal finances really help, too... Once it is set up, you can look out a couple of months and instantly know whether you are charging more than you can pay when the bill is due.
Less than 2 years on the mortgage? How awesome is that?!!
Yup, I’ve read on the TMMO forums how BS3 can be a drag since the excitement of the kill (paying debt) isn’t there. That’s OK, I get pretty excited about seeing savings balances grow (what a problem to have, huh?)
I love the peace that’s come through the program. About a month after we finished FPU and started getting our life in order, I found myself experiencing this very weird sensation. I couldn’t quite put my finger on what it was then I realized I was experiencing PEACE! I’m not trying to be cute or funny. That actually happened. Living the grind of paycheck-to-paycheck and hearing crap like “Yer always gonna have a car payment” tends to dull the senses.
Of course we still had most of our debt at that time but knowing that we were in control, had a plan, real peace, and renewed hope changed our lives. I also noted that Financial Peace University was a perfect name for the program.
As of 31 December, 2011 we’ve paid off 69% of our debt and it feels GREAT. Haven’t had a car payment for well over a year, have healthy sinking funds, and cash flow all “Murphys” that come knocking at the door.
“Better than I deserve”
Haha good one. The fact is that credit is nothing more than an “I love debt” indicator. Your statement is really just a justification to youself to have rotating debt. Period....
You may pay it off every month, but facts remain. Debt is debt. What is even funnier is your pride about the 1% rebate. The reality is that people who use cash apend 30% less (on averag) than CC users, so the kickbacks are a joke. Add in the purchasing power of cash and the differenc is amazing.
I have no issue with people that want to use CC’s, however the cards are not some great “tool” that will make a person wealthy. I’ve yet to hear one wealthy person say that cc rebates were the key to building wealth. I have heard many say that a critical element in building wealth is using cash! I’ll do what wealthy people recommend....
Haha good one. The fact is that credit is nothing more than an “I love debt” indicator. Your statement is really just a justification to youself to have rotating debt. Period....
You may pay it off every month, but facts remain. Debt is debt. What is even funnier is your pride about the 1% rebate. The reality is that people who use cash apend 30% less (on averag) than CC users, so the kickbacks are a joke. Add in the purchasing power of cash and the differenc is amazing.
I have no issue with people that want to use CC’s, however the cards are not some great “tool” that will make a person wealthy. I’ve yet to hear one wealthy person say that cc rebates were the key to building wealth. I have heard many say that a critical element in building wealth is using cash! I’ll do what wealthy people recommend....
I know what you mean...that peace sneaks up on ya. Keep living like no one else. It is an awesome lifestyle!
You didn't read my original posting, or at least comprehend it.
We don't have revolving debt. Period. Since I zero all our accounts when I get paid, I rarely even have more than $50-100 show up on my credit report each month.
The reality is that people who use cash apend 30% less (on averag) than CC users, so the kickbacks are a joke.
Whether we use a credit card has no effect on how much we spend. I don't like to carry around any significant cash, and credit cards are accepted everywhere, when checks aren't.
I have no issue with people that want to use CC’s, however the cards are not some great “tool” that will make a person wealthy.
I never claimed that credit cards make someone wealthy. But, it they make it a lot easier for us to manage money. If you don't like using them, that's fine. But, I consider credit cards to be a major convenience, that costs nothing if you use them responsibly.
I’ve yet to hear one wealthy person say that cc rebates were the key to building wealth. I have heard many say that a critical element in building wealth is using cash! I’ll do what wealthy people recommend....
Now you are really stretching things. Rebates are simply a way to reduce the costs of things you would by buying anyway, just like coupons and waiting to buy things on sale. We do all of those things. By itself, it didn't make us wealthy. We did that by spending much less than we earn each month, for decades.
If you are irresponsible with credit, that's true. But, not all debt is the same. Mortgage debt is not the same as installment loan debt (i.e. for a car). 30-day debt is not the same as 30+ day revolving debt. And finance company debt is considered worse than all of them. An underwriter explained the distinction to me long ago.
I believe you when you say that you are responsible, have discipline, and pay the debt every month. Fine. I have chosen to never again incur debt in any form. That doesn't make me better, just different.
If that works for you, that's fine. But, it isn't realistic for most people.
Interesting aside: now that I have so little debt and a simplified portfolio I stopped using Quicken. It was just gross overkill for the financial transaction activity we have.
I track multiple checking and savings accounts, as well as all of our investment accounts (especially capital gains/losses for tax filing), along with a small business that I run on the side. If I were to never use another credit card, I couldn't give up Quicken without hiring an accountant to do it instead.
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