There are no quick fixes, but there are ways to gain control over bad credit spending habits.
Many
years ago, I read in a financial self-help book that if I had a problem
with credit-card spending, I should put the card in a bowl of water and
freeze it. The idea was that it would be such a hassle to thaw it out,
you’d have enough time to thoughtfully consider the purchase and avoid
impulse buying.
Nice thought–in theory, that is. But here’s a
word of advice. If you have to thaw that card, don’t put it in the
microwave because it will (1) demagnetize the card and (2) melt the card
into a misshapen mess.
Don’t
ask me how I know these things; I just did some, ah, research! Yes,
that’s it! I did research to discover these unusual facts in case you
ever wanted to use plastic instead of paper money and you had all your
credit cards on ice.
The best advice is to improve your financial health through plastic surgery–that is, by cutting up those cards.
My
husband and I did it. We developed discipline through the spend-less,
save-more approach, and we’re in a completely different financial place
than we were when we lugged around $40,000 in consumer debt.
The
average consumer carries the largest percentage of his or her debt in
credit cards–even more so than in a mortgage or car loan. You can cut
spending in these areas, but the primary place most families need to
look is at the thin piece of plastic in their wallets.
THE QUICK-FIX FANTASY
Your e-mail inbox is probably flooded daily with promises from the
debt-consolidation industry that make claims such as “Debt relief is
just a click away!”
Here are red flags that should go up when you consider consolidating your credit card bills:
Promises,
promises. Some companies make claims that they will negotiate lower
interest rates and reduce your monthly payments in one easy step.
However, many of these debt consolidators build in a fee, usually 10
percent, as part of the monthly payment you make to them.
It’s
not worth paying someone else to do what you can do yourself. Go to the
MSN Money Web site (www.moneycen tral.msn.com/home.asp) and find out how
to consolidate your debts.
Easy-does-it loan. Some consolidators
might entice you with the ease of obtaining a debt-consolidation loan
but could end up charging you more interest than you’re paying now. You
might end up with lower payments, but you’ll pay more over a longer
period of time.
Balance-transfer trick. You might be drawn by
offers for low-interest cards, but the low rates generally last only a
few months. Then you have to switch cards again to find another low
interest rate.
This activity is often negatively interpreted on
your credit report. If and when the latest low-interest card will not
approve you, you are left paying the higher interest on the card you are
holding.
If you’ve already made such a switch, formally close
the new accounts and ask the credit card company to mark the account
“closed at the customer’s request.” Otherwise, it will appear that the
creditor closed your account–which would make you look like a poor
risk.
Decide right now that you will apply all extra monies to
paying down this debt. Use all unexpected income–an inheritance, a tax
refund, overtime pay, an employment bonus, a pay raise–toward debt
reduction.
THE BEST MOVES These are a few of the best debt-consolidation options. Some of them may be a perfect fit for you:
Home-equity loan.
This is an obvious choice that should be used with great restraint. The
primary advantage is that it tends to carry low interest rates, and the
interest you pay is tax-deductible (check with your tax specialist
yearly).
But you will have to pay an origination fee that ranges
from $75 to several hundred dollars, plus the cost of an appraisal and
title insurance, so be sure it is worth it.
Refinancing a home.
In a “cash-out” refinancing option, the property owner refinances the
entire loan for more than the property is worth and uses the extra cash
to pay off credit cards. The primary disadvantage of this approach is
that you are stretching your mortgage over 15 or 30 years.
The
total interest cost can be pretty large, so you would need to keep two
things in mind: (1) you would do this only once; and (2) you would
concentrate on paying extra every month toward the principal, thereby
shaving as much as a decade’s worth of interest off your loan.
Refinancing a car.
This is a secured loan, and you can borrow on it. But you need to
calculate whether you will run out of car before you run out of car
debt. It’s very difficult to buy a new car when you owe more than your
present car is worth.
Negotiating terms. One of the
easiest ways to lower your payments is to tell the credit-card company
you want to consolidate your loans through another lending institution
if you can’t get the interest rate down on the card you currently have.
Many customer service representatives are authorized to lower the
interest rates right there on the phone for you, and you could save
anywhere from several hundred to several thousand dollars.
Personal loans.
This is an option only for those who have undamaged credit and who
would qualify for an unsecured loan. The interest rates won’t be as low
as some of the other options, but they are usually less than the 20
percent-plus you are now paying the credit-card company.
The old standbys.
For a qualified financial counselor, visit on the web Consumer Credit Counseling Services (CCCS). They are nationwide.
Be
sure you call the nonprofit organization and not a for-profit
look-alike. These are different from the for-profit debt consolidation
companies in that their services are free (and confidential).
Their
initial consultation (by phone or in person) usually lasts an hour and
will help you decide if you need a debt-management plan. To use their
services, you must fill out a form that details all your expenses.
CCCS
will walk you through the experience of seeing these stretched out over
the course of a year. They will tell you if you can pay off your debt
without their help.
FACE THE FACTS
A critical part of assessing your situation is to list pertinent
information on columnar paper. You’ll need to order a copy of your
credit report from one of these national credit bureaus: Experian
(www.experian.com,
* Creditors
* Balance on each account
* Minimum payment
* Number of payments left
* Interest rate
* Due date
When
this information has been documented in one place, it will be easier to
ascertain your true debt load and develop a systematic plan to get out
of debt. This is something you can do at home or have CCCS do in their
offices.
CUT COSTS The most effective thing you can do to
resolve debt is reduce your committed expenses (housing, utilities,
transportation, groceries, phone and so on). But for right now, focus on
those monthly expenses that are not fixed.
It’s not enough to
cut costs if you’re not committed to applying these savings to credit-card debt. The savings will just be absorbed into spending elsewhere
unless you earmark these cuts to go to specific debt.
A more
dramatic approach would be to reduce your fixed expenses by trading down
in a home and/or car in order to get out of debt. This is an issue that
you will need to decide based on your specific situation.
USE CREDIT RESPONSIBLY
You want a card that charges a low, fixed interest rate (not merely a
temporary introductory rate) and has no annual fee. Don’t be deceived by
some of the “reward” cards. For example, most cards that offer
frequent-flier miles require that you earn 25,000 miles (at one mile per
dollar, $25,000 spent) in order to buy one ticket (which averages $250
to $300).
For a list of credit cards by category (low-rate, no
annual fee and others), go to www.bankrate.com or www.card trak.com.
Other tools available to help you get the card that is right for you are
www.getsmart.com or www.creditcardgoodies.com.
PAY DOWN THE PRINCIPAL
My plan for debt reduction was based on solid principles and some of my
great-grandma’s common-sense strategies. Much of the best financial
advice is on the Internet or compiled in inexpensive books.
You
can follow some simple steps and watch your debts diminish. Here are a
couple of strategies to pay down the principal rather than merely
managing the interest:
Pay the original minimum on each credit entry.
If you continue to pay the amount of the original minimum payment, you
will soon find that the required minimum is reduced. If your payment
remains at the higher amount, you are paying on the principal and saving
on interest by paying the debt off early.
Pay the least first or the most first.
Organize your debts in one of two ways. Put either the highest interest
rate or the shortest payoff time as the top priorities on the list.
If
all the payoff figures are close, pay the one with the highest interest
rate. However, if you have a much smaller note at a lower interest
rate, going ahead and getting it paid off tends to serve as a morale
booster. Then you can apply the total amount of that payment to the next
bill on your list. For example, if you have a card on which you owe
$1,500 at 20 percent and another on which you owe only $200 at 18
percent, go ahead and pay off the small debt first.
REBUILD GOOD CREDIT
A bankruptcy will stay on your credit report at least eight years. Even
after you’ve rebuilt your credit, you won’t be able to qualify for
rock-bottom mortgage rates.
According to Jean Sherman Chatzky,
financial editor at USA Weekend Magazine (January 21, 2000), these are
the things that will have to be done to rebuild credit:
Close accounts you don’t use. To lenders, charge accounts or home-equity lines of credit mean you could go on a spending spree at any time.
Don’t hit all your credit limits. If you’re using 80 percent or more of your available credit, it’s a sign to lenders that you’re overextended.
Limit inquiries into your credit record.
Minimize the number of times you apply for credit because each inquiry
will appear on your credit report, whether you get the credit or not.
Keep in mind that all inquiries for one purpose, such as a mortgage,
will count as one.
Don’t miss payments. Automate as many payments as possible. If you make sure the funds are there, you will never be late on payments.
Hopefully,
you are motivated to get out there and hit the pavement! Remember that
if a woman who has had $40,000 of debt and freezes her credit cards can
become debt free, so can you!
Ellie Kay
is an author, speaker and Family Financial Expert. Her books include A
Woman’s Guide to Family Finances and Shop, Save and Share (Bethany
House). She and her husband, Bob, have seven children.
James Lasher 
Abby Trivett 
