Credit Basics
Digging Your Way Out From Under Mountain Of Debt
Sunday, March 16, 2003
Chris Winston
Herald-Journal
"The credit card was such a convenience. We would just whip it out every time we wanted something," said Jim Miller, who works in the maintenance department with Spartanburg School District 5. "We would just walk in the store, and put (the credit card) down." Three years ago, that changed.
Listening to financial guru Dave Ramsey on the radio, Jim Miller realized that debt didn't have to be part of his life. By the end of this year, the Millers plan to be completely out of debt. "We were deep in a hole," he said. "If everything goes according to plan, we will be totally debt-free by the end of the year -- or before."
Ever since Frank McNamara of New York's Hamilton Credit Corporation invented the Diners Club card in 1950 to give businessmen a convenient way to charge expenses, credit has become an increasingly large part of American life. In the 53 years since the first credit card debuted, consumer lending has been a blessing to some and a burden to others. In less than two generations, consumer debt has grown to more than $1 trillion, much of it on credit cards.
"A lot of credit cards were given to people not able to handle it," said Jordan Goodman, author of "Everyone's Money Book" and former staff member at Money magazine. Goodman, who also runs the Web site www.moneyanswers.com, calls these people "debt desperados," many of whom are in real financial trouble. "It's a problem," he said. And many financial experts across the country are now working to help people work through their debt problems.
Target the problem
No debt-reduction plan is going to work, experts say, unless you determine how you got into debt. Many people incur debt because they don't have a budget or can't stick to one they have. Understanding where your money is going each month is the first step to getting out of debt. Without proper budgeting, they spend money they don't have on credit -- and then have trouble paying the bill when it arrives.
"When setting a budget, people need to look at the big picture," said Howard Dvorkin, president of Consolidated Credit Counseling Services Inc. "Too many people we deal with don't plan ahead".
"They spend based on what they want at the moment, rather than looking at the consequences down the road."
A recent survey by the CCC showed the most common reasons for debt are budget problems associated with too much spending on housing, transportation and food.
Many people, especially in metropolitan areas, spend too much of their total food budget on eating out.
"It's a lot less expensive to cook at home and bring lunch to the office, but eating out is more convenient," Dvorkin said. "Unfortunately, there is a trade-off for convenience."
When they budgeted their monthly incomes, the Millers decided they were spending too much money eating out. They also quit traveling as much, and now spend more time with their eight grandchildren. So, they began growing more items in their garden and eating at home more. "We really enjoy eating food out of the garden," Jim Miller said.
Stop creating new debt
If you're serious about getting rid of those pesky monthly credit card bills, there is one step you need to take before any others. And while financial experts agree it may be the toughest step, it is also the most important. You must stop adding new debt.
"If you want to get out of debt, just stop creating new debt," said Tom Allen, founder of www.ihatedebt.com. "If you don't do anything else, you'll eventually work your way out of debt just by paying down on what you have." For people without the discipline to not make purchases on their credit cards, this may call for dire actions. You can cut up those credit cards.
You can freeze them and thaw them out only in an emergency. You can leave them at home when you go shopping. No matter what your plan, it's difficult to attack your debt while you're adding more principal and more interest to your statement each and every month.
Focus on one at a time
Once you've set up your budget to spend only money you have and you've quit amassing more debt, you can begin paying off the bills you already have. Some experts suggest listing your debts from smallest to largest. Once you pay off that pesky $250 Target card balance, you can roll that payment onto the $500 you owe Best Buy. Then, you can take even more money and quickly take care of the $1,000 Visa bill. Other experts say you should list your debts according to their interest rates, and pay off the ones first that are charging you the most interest. Begin with the 18-percent owed to one credit card company and then the 15-percent interest you're paying to another credit card before paying more on your 7-percent student loan or 5-percent auto loan.
Either way, putting as much as you can toward one debt until it is paid off, while paying minimum payments on everything else, and then moving to another debt is probably the best way to go. Starting with the smallest balances and working your way larger will give you a sense of accomplishment and encourage you to continue, experts said.
Once you pay off those credit cards, it is best to call the companies and cancel those cards so you won't be tempted to add more debt to the pile. Then, your credit report will show that you chose to close the account. The Millers listed their debt from smallest to largest. After attacking their credit card balances one by one, they moved on to bank charges and then their home equity loan. Now just three years later, they are prepared to be debt-free, even with bumps in the road.
Janet Miller missed four months of work at Milliken & Co. last year after surgery. And the hospital stays and procedures amounted to $3,000 in more bills.But that didn't deter the Millers -- even if it put them a little behind schedule. "We got back on the game plan and got back on track again," Jim Miller said.
Look for help
Some people are too deep in debt to find any money to put toward paying off bills. According a recent survey by the Cambridge Consumer Credit Index, of those people who carry balances on their credit cards from one month to the next, 6 percent say they are making no payments while 40 percent say they are making just the minimum monthly payments. If you are still having trouble paying more than the minimum on your credit cards, it may be time for serious help.
Debt relief clearing houses can combine all of your unsecured debt (student loans, medical bills and credit cards) into one monthly payment at interest rates as low as 0 percent. If you make the payment for several months in a row, there is even a rebate back to you to encourage you to keep it up. "You can actually get paid to get out of debt," said Goodman.
Using such a service will add an item to your credit report called "DMP" for debt-management program, but Goodman said it is a neutral designation that shouldn't affect future credit offers. "In three to five years for most people, you'll get out of debt," Goodman said. Goodman does not recommend ridding yourself of all debt.
He said it is worthwhile to take out loans for items that appreciate in value (homes and educations) or that cost too much for most people to pay in cash (automobiles). In fact, he said it's important for your credit report to show a range of debt -- from mortgages to auto loans to student loans to credit cards -- for a variety of reasons. Not only are credit cards often necessary for renting cars or booking flights, he said your credit report is used by your auto insurance company, a possible employer or future landlord.
If you're still not able to make headway into your debt, there may be only one option remaining: filing for bankruptcy. While millions of Americans are filling for bankruptcy every year, this is not a step that should be taken lightly. Experts say such a step will keep you from getting any credit for years. And some forms of credit won't even eliminate your bills. "This is a super-last resort," Goodman said.
