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By Lucy Lazarony • Bankrate.com
It's time to get rid of that credit card debt once
and for all.
It won't be quick. It won't be easy. But it can
be done.
"It's day after day, month after month. There's
no quick fix. It's hard," says Ruth L. Hayden, a financial
educator and author of How to Turn Your Money Life Around.
"It's like a tunnel. You just have to go through it."
Once through, you can celebrate with a personal
declaration of financial independence. You've broken free from
the cycle of debt. The days of depending on those little plastic
cards to make your life go are over.
"And then the real fun starts," Hayden
says.
It's a worthy goal to build up a $6,000 nest egg
in two years by socking away at the rate of about $250 a month.
But if you're starting out deep in debt, you've got to make some
tough choices about where you're going to shovel that money --
toward building a mountain of cash or toward filling that financial
hole.
Here are the cold, hard numbers: Someone who has
a $6,000 credit card debt and pays 15.56 percent interest -- the
Bankrate.com (tm) national average for a standard card -- would
need 30 months to completely pay it off at $250 a month. And if
that someone wanted to build a $2,000 nest egg first before attacking
the credit card debt wholeheartedly, it would take even longer.
By paying the monthly minimum of $120 to the credit card company
and applying the remaining $130 to the nest-egg fund, it would
take 18 months to build up the $2,000 savings and another 25 after
that to pay off the debt.
Step one: Assess the damage
No matter which route you take, the time to start is now. Step
one is assessing the damage. Take stock of your assets and liabilities.
"Find out where you are," says Joy Thormodsgard,
senior vice president at the National Foundation for Consumer
Credit. "You're looking at where you owe and what you owe
and you're looking at credit."
List all creditors, noting balances, credit lines,
interest rates and monthly payments.
Track expenses. How much money comes in and how much goes out
each month? Where's it going and why? Are there places you can
scale back spending and free up more money for paying down card
debt? "You have to aggressively dig into those debts,"
says Meg Green, a certified financial planner in Miami. "If
it means pulling in your belt, do it."
Stop charging up those credit cards. Pay with cash or debit cards.
If you must pay with a credit card, make sure you can pay off
that new charge that very month.
Thormodsgard suggests waiting 24 hours before making a credit
card purchase.
"Give yourself a 24-hour cooling-down period,"
she says. "Revisit your goals and decide if it's as important
as you thought it was when you first saw it in the store. Sometimes,
it's good to bounce it off someone else."
Lots of people end up overspending simply because
they don't pay close attention to their finances. Renee Rupe,
education director at Consumer Credit Counseling Service of Greater
Denver, suggests carrying an index card in your checkbook to help
keep you on track. On the card, write how much goes to savings,
how much for groceries, how much to debt and so on.
"We call it being conscious of all of your
money all of the time," Rupe says.
Step two: Pick a pay-down strategy
As for paying down the card balances you do have, zero in on one
card at a time. Pay $25, $50, $100 or whatever you can spare on
top of the minimum payment. Minimize interest costs by transferring
balances to the card with the lowest interest rate.
From a dollars and cents standpoint, it makes the
most sense to pay down the card with the highest interest rate
first. Some consumer experts, however, urge people to attack the
card with the smallest balance first because it can help get the
ball rolling and keep it rolling. Once that first balance is paid
off, focus on the card with the next smallest balance and so on.
"You have a relatively quick sense of accomplishment
and that feeds into your future success," says Vickie Hampton,
associate professor of personal finance at the University of Texas
at Austin.
Close all empty credit card accounts -- that way,
you won't be tempted to spend. The aim is to get down to one or
two credit cards and stay there.
Don't forget to make room in your budget for periodic
expenses such as car maintenance, home repairs and medical bills.
These expenses are inevitable. Cars, houses and even bodies break
down from time to time.
"I call them the 'have-tos', nonmonthly 'have-tos.'
If you're going to have those things, you have to be willing to
budget a certain amount of money to them each month," Hayden
says.
"You have to get serious here. Can you afford
your life? Can you afford your car? Can you afford the commitments
you take on? It's not just monthly payments."
If you don't have some cash stashed away, chances
are you'll end up charging up that credit card again. Months of
chipping away at debt can be negated in one swipe of the card.
"It's demoralizing," Hayden says. "Without
savings, people go in and out of debt and never get out."
Ideally, every family should be able to get their
hands on three- to six-months' salary -- but a $2,000 to $3,000
cushion is better than nothing.
While all consumer experts believe building up
an emergency fund is a good idea, they can't agree on where it
should fit into a debt reduction strategy.
Some financial experts chafe at the very thought
of tucking money into a low-interest savings account when there's
a mountain of credit card debt growing at 18 percent interest.
They say pay off the card debt first and worry about savings later.
Others, such as Hayden, recommend building up savings
before starting in on the card debt. Still others suggest building
up savings and knocking down card debt simultaneously.
"I don't think there's a right answer. Mathematically
there may be a right answer but that might not be the right answer
for an individual," Hampton says. "If they want to reduce
finance charges as much as possible, they'll pay off as much debt
as possible."
If you're strapped for cash, you may want to pay
down a couple of cards with low balances. Then split the money
that was going toward those monthly payments between savings and
other card debt.
Step three: Stick with it
Look at your finances and decide what's going to work for you
and what kind of pay-down plan you can stick to.
"It shouldn't be so painful that it's a drudgery,"
Rupe says. "That's the biggest challenge."
Hampton adds, "You don't want to keep yourself
on too tight of a budget or you'll rebel. You'll have a little
temper tantrum."
If you're having trouble starting or sticking with
a debt-reduction plan, you may want to visit a credit counselor.
Let an expert take a good long look at your finances and crunch
the numbers.
Then start anew and commit to the plan. Lots of
folks start off strong and give up after a few months. Set shorter-term
goals and reward yourself when you've achieved them.
Celebrate when each account is paid off with a
bill-burning or card-cutting ceremony. Involve the whole family.
"Have a celebration -- a little party with
cake and ice cream and everything," Rupe says.
Made it to the halfway point? Splurge with dinner
out.
"It's tough stuff. You have to bring a little
fun into it," Green says.
Stay focused. Think of all the things you'll be
able to do with your money when that card debt is gone. It could
be a vacation, a new stereo, or longer-term goals such as moving
into a new home or paying for a child's education.
If that's not enough of an incentive, just think
of the relief. There's a kind of post-debt euphoria that comes
at the moment you stand up after clawing your way out from under
a mountain of bills.
Rupe sees it all the time with CCCS clients who
have graduated from a debt-management plan.
"In the end they all say, 'I'm free.' "
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