How to Dig Out of Credit Card Debt

| 1 Comment | No TrackBacks
The number one reason for personal bankruptcies is an over-extension of credit card debt. Many of us our living paycheck to paycheck, and struggling to get out of debt.

Watch this funny parity for Saturday Night Live clip, that comes along with some great advice on how to get out of debt -offered by Jim Malmberg my co-host of SpotLight and my colleague at ACCESS .

Digging out of Debt:
The Starting Point

First, start with making a list of all your creditors. The list should contain: name of creditor - current balance - current interest rate - minimum payment. Include everyone, insurance, mortgage, utilities, etc.

Second, cut up some cards. If you have more than three credit cards on the list - then you have too many. Evaluate your ability to cut up those credit cards that carry the highest interest - so that you're not tempted to use them again. DO NOT CLOSE THEM - that will lower your score, just cut them up.

Third, organize the list. At the top of the list should be your charge cards organized from highest to lowest interest rate. List anyone here that charges you interest!  Below that list your "fixed monthly payments", like rent, utilities and insurance - the bills you must pay every month.  Now list "additional expenses" like gas, food, and entertainment.

The Plan

Look at the top of the list.  Those are the creditors that are eating away at your money.  Those are the ones to pay-off first.  It's as simple as that.  Find every nickle and dime and quarters that you can to get that creditor who is charging 29% interest paid off.

What Not to Do

Due to high fees and charges, these situations will result in more debt.  Many of these fees equal anywhere from 400% to 1,500% APR interest.

DO NOT go to payday loans.
DO NOT get cash advances from another charge card.
DO NOT transfer the balance to another charge card.

What to Do; Finding money anywhere you can.

Retirement Contributions - consider decreasing or stopping them for a period of time.  With the stock market as it is, most have seen their value decrease.  By taking this and paying off your debt, you will have more money to invest at a later date.

Cash Value in Life Insurance Policy - consider withdrawing this out for a few years.  Many policies charge less than 6% interest for doing this.  Always pay the interest annually.  Also place this on your list of creditors so that you will pay yourself back.

Cars, Boats, and other Big Toys - consider getting a conventional loan from the bank for these items.  They will use them for a secured loan, which usually carries a lower interest rate. You can only use these items if you have the title.

Stocks - again these can be used as "collateral" for a low interest secured loan from the bank.

Savings Accounts - take the money and pay down the bad boys charging 15% or more.  You will never get ahead by saving money at 2% interest while stretching payments out at 30% interest.

Borrow from your folks.  Paying them 12% interest is better than paying a stranger 30%.

Consider working a second job.  Some times a few extra hundred dollars over 6 months can make a big difference.  But watch carefully.  Sometimes the extra gas, eating out and other additional expenses doesn't help in the long run.

Cutting expenses where ever you can.

Cable. Can it be canceled or can you find a lower cost service?

Phone. Are you paying for features that you can do without? Do you really need more than one phone? Have you looked at going to a cell phone?  Watch out on cell phones, getting into the wrong plan can cost you more than you anticipate.

Utilities.  Most have a level payment plan that allows you to pay a fixed amount every month.  It's great for budgeting.

Eating Out. Do you eat out regularly?  Do you take your lunch to work? Taking lunch to work can save you almost $100 a month.

Rent-to-Own. Using these services can result in annual interest rates as high as 400 percent. No one can afford that for a sofa.

Payday loans. Using these services can result in annual interest rates as high as 1,500 percent. Stay away from them!

ATM Charges. ATM charges can be a significant cost over a year.  If an ATM charges you $1.50 to get $50.  That's 3% for just getting your own money.  If you incur that charge 3 or 4 times in a month, that's 144% interest over the year.

Lottery tickets. These might seem like insignificant costs, a dollar here or there, but over a years time they can add up dramatically.  One individual we counseled bought 3 tickets a week, costing $750 a year - that's $65 a month which could be applied to credit card debt.

Checks.  Have you bounced a check? This can result in $30 or more in bank fees and service charges?  By signing up with an overdraft protection at your bank you maybe able to save hundreds of dollars a year. (See "It Pays to Balance")

Charge card statements.  This maybe a strange area to cut expenses, but you might be amazed.  Frequently we find double charges on accounts.  These charges may come through a year later.  We've also found errors on the amounts.  Keep your receipts and balance it.  It really doesn't take but a few minutes to match them up.  Watch how your payment is applied. Did you do a cash advance? Those carry higher interest rates and unless specified by you, these balances are paid last.

Debit Cards.  Just like charge cards, problems can occur here too.  Some businesses actually place a fixed reserve on your card until the transaction is completed.  Automatic gas pumps are probably the worst, with reserving $50 each time you use them.  If you should use one when the money is tight, you can end up bouncing checks. While debit cards are a nice convenience, they can lead to added expenses.

Negotiate arrangements with creditors

Call the creditors with the highest interest rate.  Tell them that you've been a loyal customer and you'd like to know what can be done to lower your current interest rate (APR).  You can also try this on your mortgage.

If you don't get an adjustment try again in a couple of days, you may get a representative that will be more helpful.   FYI -Long time customers have a better chance of getting their rates lowered.

Look at the creditors at the bottom. Will they adjust your payments down?  Will some of them take 1/2 payments?  Are there fees for this? If there are - don't do it.

Don't Neglect Yourself

No plan will work if you don't budget for yourself and some savings.  Remember to plan for those things you need and begin setting a little aside for emergencies.  Even if you pack your lunch for work and pocket what you would of spent (avg $6 per day) - that would mean a $120 per month could go into your savings.  Use those savings when something comes up - like new tires to replace a flat, etc.

Tell us your story of success for getting out of debt!
Email or post on comments here or on "share your story".

No TrackBacks

TrackBack URL:

1 Comment

Great article with great advice. You offer a lot in this post. I like how you've put the do's and don'ts in there. Very helpful. Thanks.

Leave a comment

A memoir exposing the steep price consumers pay when facing mortgage servicing errors, inaccurate credit reporting, illegal debt collection practices, identity theft and weak consumer protection laws. THE BOOK » DENISE'S STORY »