CREDIT CARD DEBT

Prevailing public opinion and common advice from “financial professionals” is to pay off the credit card with the highest interest rate and begin saving only after your credit card debt is paid off.

Fact: We are a debtor nation and we have to be realists

Although we would love to be perfect, use our credit cards with total control, never accumulate debt and pay any and all debts off each month, the reality is that we are human. It’s time to get real! Our country lives off debt and most of us want instant gratification. We want it, we want it now, and we’ll worry about tomorrow when tomorrow comes. That’s a great plan…except that unfortunately, tomorrow is now here, our debt is enormous, the interest is not tax deductible and it is eroding our lifestyle in every way. Think about what you could do with that money if you didn’t have to make that payment each and every month.

OUR GOAL: ELIMINATE CREDIT CARD DEBT AND USE THEM ONLY IF WE HAVE THE MEANS TO PAY THEM OFF EVERY MONTH!

Fact: We must live within our means

We need to be honest with ourselves. Can we live, if we had too, without using credit cards at all? In other words, are we earning enough each month to pay all our bills, eat and play without charging anything to that little 4x2 piece of plastic? I am not suggesting that you live your entire life this way, but I am saying that this is where we need to start.

If you are not earning enough to survive, then reading the rest of this chapter won’t help. First, you must get to that place as soon as possible. The longer you stay in this downward spiral, the longer it will take to recover. Until you stop and take honest stock of your situation, the life you are dreaming about can’t happen.

That might mean asking for a raise, considering work instead of being a stay-at-home parent, getting another job with a higher salary and benefits, credit counseling or even bankruptcy, but the cycle has to end to begin the new chapter of your life.

Fact: There is a debt cycle

Here is what most of us do, and it is with the best of intentions.

The credit card bill comes and a bit of depression sets in. Our goal is to, “get this paid off, darn it!”…and we are a bit frustrated with ourselves.

So, inspired, and with money in our checking account we know that paying the minimum won’t do. We double it or more and write the check, knowing that now we are getting somewhere and feeling pretty good.

The days go by and soon, it is near the end of the month. Our checking account is not looking nearly so great as it did a few weeks ago and while strolling through the mall, we find something that we simply must have. We did after all pay a nice chunk toward our credit card debt. Why not just charge this simple pleasure? Deal with it later?

Uh oh! Can you see it coming? You are right. Nothing has been accomplished and we are right back where we started in the vicious, unending debt cycle. Our self esteem has taken a blow and it seems like we will never be free.

Fact: Breaking the cycle isn’t as difficult as it seems

The toughest part will last for only a month or two, and it will become easier. More importantly, as you begin to break the cycle, the feeling of accomplishment will only help you continue the process.

Now for the tough part…because it is counter-intuitive.

For the first month or two, or if you are a slow learner, as long as it takes – Only pay the minimum due on each and every credit card bill AND under no circumstances use your credit cards.

If you can’t do the above mentioned, go back to:

Fact: We must live within our means!

Now, make a list of all your credit cards. This list must include the name of the card, the balance due and the minimum payment. (For our purposes in this chapter we are not including student loans.) Please notice that not once have I mentioned the interest rate.

We are not going to play the transfer-money-around-finding-the-zero-interest-rate-offer game. If you want to start that way, fine, I’m not saying zero interest isn’t better than interest!

Okay. Now that you have the list, arrange your list in order of Balance Owed. The top of the page should begin with the card with the LOWEST balance increasing down the list with the last card being the one with the highest balance. Once again, and this bears repeating, we are NOT looking at the highest interest rate.

Remember in the very beginning I cautioned that most money decisions are based on emotion, and I want you to feel a sense of accomplishment as soon as possible.

Identify the card with the lowest balance and when it’s time to pay that bill, and that bill only, pay a bit more or a lot more than the minimum. As much as you think you can comfortably pay and still not use your credit cards. Continue to pay the minimum on the cards with higher balances. If you have extra money that can be allocated to the credit card debt, add that onto the card with the lowest balance.

Soon, one credit card will be paid off because it had the lowest balance. Wow, does that feel good or what? That sense of accomplishment is setting in, and you can see light at the end of the tunnel. It’s all downhill from here.

You will love this next step. Choose the card with the lowest balance again but this time pay AT LEAST, the minimum amount due, PLUS the minimum that was due on the card you just paid off. If you can, of course, pay even more. Continue paying more, paying off cards by adding the previous minimums to the next card you will be paying off.

As you proceed you will notice fewer credit card bills in the mail, less interest payments due each and every month, and a terrific feeling of accomplishment.

For Example: Let’s look at the credit card debt of Gilda, although everyone calls her Gucci because her favorite expression is, “If I’m going to be a bag lady I might as well make it a Gucci.”

Her credit card debts are:

As you can see from the list, the card with the lowest balance is the Macy’s card. When that bill arrives, that payment should be as much as she can pay without resorting to using any credit cards later in the month. Every other bill, Visa, Nordstom’s and American Express should be paid the minimum payment.

Let’s say that Gilda pays $100 per month on her Macy’s bill and continues to pay the minimum on the others. In about 7 months, the Macy’s bill will be paid off. Now her list looks like this.

Credit Card Balance* Minimum Payment

*For purposes of simplicity the payments made to these cards over the 7 months was subtracted but no credit card interest shown.

Gilda now feels really great, she has accomplished her goal and now only has three credit cards left. Remember, the minimum on the Macy’s card was $21. She adds the $21 to the minimum she has now on the Nordstom card which is $36 so that she will be paying at least $ 57 each month to Nordstom. Once again, more is better but only on her card with the lowest balance. Very soon Gilda will be able to buy all the Gucci bags she wants!

Fact: Sooner is better than later

Now, I feel compelled to add one more thing. Many financial “professionals” advise that because reducing credit card debt is so important, you should not commit to any kind of saving plan until they are paid off.

I say, see the last fact! (We will revisit this little item in much more detail in another chapter.)