Skip to comments.Cutting Your Credit Card Debt: How to Get Started
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!
“Cutting Your Credit Card Debt: How to Get Started”
Cut your credit cards. There is a special slot in most shredders for them.
I was in a similiar spot.
If this woman has a 401K and can borrow against it, I recommend that she take out a loan and pay off the cards. The interest rate charged (on the loan) is significantly lower.
In the case of my loan, the money is automatically deducted from my paycheck.
And lastly, cut up your cards or maybe keep one just in case of an emergency. But don’t use it unless you absolutely positively have to.
My vote goes to the first political party committed to this platform for the U.S. Government:
FIRST: STOP USING YOUR CARDS
SECOND: MAKE A BUDGET
THIRD: DON’T FORGO SAVINGS
FOURTH: DECIDE WHICH CARDS TO PAY OFF FIRST
FIFTH: COMMIT TO A PAYOFF SCHEDULE
This will give you some breathing space....
I put all my cards in a glass jar of water...frozen in the freezer.
Rotsa ruck with that. As has been said by others, we don’t need a third party, but we could use a second one.
The first thing is to realize that debt (barring catastrophic events) is a product of behavior and not of an inanimate financial instrument. Guns are not to blame for shootings and credit cards are not to blame for debt.
The second thing is realize that not all debt is bad. If it allows one to unsustainably live beyond one’s means it is a problem. If it increases ones productivity (i.e. a mechanic buying a lift for a garage, buying a car to travel further to a better job, building a shop for a woodworking business, etc.) it can be good debt.
I would not borrow 401K money to do that. Most people that
do end up running the cards back up.
Paying down over time diciplines one to actually spend less
which is the heart of the problem.
examine your supermarket and food bills....
buy in bulk...get 2 for 1 offers....cut coupons.....make your own lunch to take to work.....take a pot of coffee with you to work....dig up the lawn and plant potatoes and other veggies (added benefit is the exercise)....enjoy life as those cards get paid down.,....
I keep a big sheet at my desk showing each credit card and mortgage on a monthly basis....keeps the motivation up.
That works with men. Women never learn. ....*ducking for cover*....
I’ve NEVER had a credit card...I was raised by Germans.
I pay for everything in cash.
There are yet other ways to build on this scenario that will help a person extricate from the situation faster. Again, using what was suggested as the starting point.
1) Once you have a plan, consider add-on ways to speed things up. To start with, you may have a family member that if you explain the situation and your plan, might give you a small, floating loan, with little or no interest, that can be used strategically, with their approval, to accelerate your heaviest interest payments, then be repaid to them.
Typically, this might be a few thousand dollars that you could collateralize at 100% to them with something you have of value that you own, you give to them with a contract that they will return it once you give them their money back. For example title to your car at bluebook value.
So you can continue to use your car for the time being, get out of your most high interest debt, and divide your income between minimum payments for your other debt and getting enough income to repay their loan.
By doing this in stages with short term loans, you can increase their confidence that you will, indeed, pay them back.
2) Actually create bookkeeping for your income and expenditures, to help you discover things that cost a lot but provide little value, such as cable TV, subscriptions to entertainment such as Netflix and magazines.
One powerful tool to use is grocery shopping selectively and with coupons. Make a list of common purchases and compare prices on them between 3 or 4 local stores, looking for price trends.
Some stores specialize in bulk purchases, others use loss leader sales, some have house brands of products that are a lot cheaper than name brands, etc. And sometimes there are coupon wars, when competition is strong.
All told, shopping smart can save hundreds of dollars a year. So can avoiding restaurants and fast food. And it adds up.
I've done this before, too. I ended up regretting it.
As someone else pointed out, the typical response is to simply run up the credit card debt again. That's not what happened to me, though.
My money was sitting on the sidelines during one of the biggest growth period in the US Market. As a result, my current balance is significantly lower.
Of course, you may end up taking profits and paying a nominal interest rate (which goes into your own account) while the market tanks, as well. But in the long run, it's usually not a good idea.
Why you! No wonder your name is moehoward! ;)
While I admire your principal, not having any credit cards severely limits your purchase power, as well as possibly your credit score.
Have you ever made reservations at a hotel? Ever bought airline tickets? Ever bought anything online?
I suppose there are ways around those tasks WITHOUT having a credit card, but it makes it very difficult.
“The interest rate charged (on the loan) is significantly lower.”
If the job ends for any reason, the full amount comes due immediately.
Never borrow from family. They go from being a family member to a creditor. You can destroy a relationship like that.
Take one card (usually the smallest) and throw all your money at that card, making minimums on the rest. If you can, get a loan from a bank or credit union to pay them off so you only deal with one payment. Then kill the accounts. Dead.
But first comes the budget. You have to know where your money is going.
If your point is to stop using them until you have paid off the balance and request new cards, I agree.
But, you don't want to close all your credit accounts. That will hurt you later when you apply for new credit (mortgage, car loan, etc.)
Instead, I'd consolidate onto 1 or 2 of your cards -- the oldest accounts and/or no-fee accounts. Don't worry about interest rates... your goal is to pay them all off each month and never pay any interest.
Keeping the oldest accounts boosts the length of your credit history. Keeping the no-fee accounts are free, as long as you use the card about once a month to keep the account from being closed due to inactivity.
Be hard to do for me ... I don’t have ANY debt
“That will hurt you later when you apply for new credit (mortgage, car loan, etc.)”
Not really. The only thing that hurts you is being late or not paying. A zero score is just as good as an 800 score. It means you have stayed out of debt. But your credit score will still reflect power bills and such so a 0 score is unlikely. People with 0 scores are usually housewives with rich husbands.
Try using a debit card account. For security reasons, open an additional debit card account (checking account) at the same bank you normally bank so that you can transfer money to that account as you need. Debit cards also have protections credit cards have, and this also helps limit any liability of someone, for a short time, getting all the money in the account.
Most of the yesterday’s issues companies had with debit cards are nearly gone.
Sorry, but having just gone through this with a young adult daughter -- no credit history (or minimal credit history) is hugely different than a established credit history.
You might get a loan, but it will be considered sub-prime and your interest rate will be as much as 6X what you will get with an established credit history.
The only difference between men and boys are the price of their toys. Cutting back or eliminating the toys helps in meeting the budget.
To slow your use of a credit card:
Take a baggie, fill with water, insert card, place in freezer...
Boy, that’s a lot of words to say “Don’t spend money that you don’t have”.
If you are in over your head, ask to speak to the loss mitigation department. They have the authority to write off losses, without the borrower having to declare bankruptcy. The creditors have already factored in the bad loans, do not feel embarrassed to ask for a write down as part of a commitment to pay off some final balance due.
Yes, this will cause your credit rating to take a hit. But if you are in over your head, it has already sufferred.
“not having any credit cards severely limits your purchase power,”
False. Cash is king for purchase power.
” as well as possibly your credit score.”
Who cares. A credit score is nothing but “an I love debt” score and if you have no debt you have very little risk in life.
“Have you ever made reservations at a hotel? Ever bought airline tickets? Ever bought anything online?”
Yes. Constantly. A debit card can be run as a visa/mastercard and carries all of the same securty and protection.
All budgets are not created equally. Some do not necessitate toy liquidation.
“You might get a loan, but it will be considered sub-prime and your interest rate will be as much as 6X what you will get with an established credit history.”
Only when you use those “good credit yes, bad credit no” companies that could hire monkeys to press computer boards. If you use an underwriter, then you will deal with thinking people. Of course, they are old school and want to make sure the borrower enters with 20% equity and has the means to pay the actual monthly bill...
“Boy, thats a lot of words to say Dont spend money that you dont have.
And that is a lot of words to say, “act your wage.”
This thread needs some Dave Ramsey expertise...Sorry, it has been awhile since I pinged everyone. I can not figure out how to do anything but post from my smartphone and have not been at a computer for a very long time...
Happy New Year fellow DR fans.
Dave Ramsey Fan Ping List.
If you would like to be added to the Live like no one else, so that you can LIVE like no one else list, feel free to Freepmail me.
I bought myself a DR Daily Desk Calendar and it is pretty cool. If I get permission to post the daily advice, you will hear more from me. ;-)
I didn’t want to get FR in trouble for any copywrite infringement, so I sent a request to his team for approval to post them here...I hope to hear soon.
I don’t want to get into specifics, but my wife and I finally got out of debt by paying the credit card off with a large balance. You don’t know how many dang years a high credit card balance adds to your life. I think we may USE CASH and buy a bottle of champagne (cheap) to celebrate this milestone!
Personally, I wouldn’t recommend that. If you borrow against your 401K and change or lose your job the balance of the loan becomes due immediately. Dicey thing to do.
“no credit history”
But the person in question here already has a credit history.
Ah, but you previously wrote:
I was responding to that comment, and corrected you. But, if you want to talk about this particular person, let's go back to what I originally wrote:
If you close all your credit accounts, you will still have some credit history, but not recent history. And after 7 years, it will disappear altogether. This isn't an option for this particular person, since she still owes $20,000. But, it's still good advice: once you have established credit, you want to maintain it.
Closing accounts prematurely will also hurt you in another way: it will reduce your available credit, and increase your credit utilization. An example: you have two credit cards, each with a $10,000 credit limit. You have a $9,000 balance on one of them, but the other is paid off. If you close the account with a zero balance, your credit utilization will jump from 45% to 90%. That's an exaggerated case, but 90% utilization of revolving credit is considered "maxed out", and will significantly lower your credit score.
Your credit score has a number of components: credit utilization, length of credit history, timeliness, etc. Late payments in the past 24 months have a big (and perhaps the biggest) effect, but your credit score can vary quite a bit even if your credit is "perfect". And while you may be able to get a loan with little or no history, it will substantially increase your finance rate.
I showed my daughter how much her monthly payments would be with a ideal credit score (i.e. 750+) versus little or no credit. She now understands how important it is.
BTW, I haven't financed a car in nearly 30 years. Since then, I've paid cash each time. And when I applied for credit recently, my credit score was lowered because I had no recent car loans (despite credit cards that are 35 years old, and a mortgage recently paid in full)!!!
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.
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.
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