A 10-Step plan to paying off your credit cards
that goes beyond common sense
and warns you about the common gimmicks, traps and pitfalls that
can push you further into debt.
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With the possible exceptions of getting a divorce, or a death in the family, there are few things in life that are more difficult and more painful than paying off your credit cards.
High credit card debt is a serious problem in United States that has surpassed epidemic levels. It has over-taken most Americans lives and completely subjected them to long-term financial prison. The average credit card debt per household was $9,312 in 2004, according to CardWeb.com. The total balance on the nation's credit card debt is $665 billion - that's $10 billion more than the entire economy (Gross Domest Product) of Australia. If the credit card debt of all Americans was it's own country, it would be the 18th largest economy in the world. Politicians and the American public complain about the profits the oil companies are making - but it pales in comparison to the $30.6 billion in profits made by credit card companies in 2005.
Although it's easy to dish out the blame to credit card companies (who charge usory levels of interest up to 30 percent), or the government (which deregulated the banking cartels that paved the way for them to engage in predatory lending and mafia style interest rates), - a fair amount of blame belongs to the American consumer. According to Professor Robert Manning, author of the book, Credit Card Nation: The Consequences of America's Addiction to Credit, American society has transformed from a society that valued hard work, sacrifice and discipline to one that emphasizes personal consumption, instant gratification and artificial displays of wealth.
So you are not alone in this problem. There are millions of Americans just like you. And whether you blame yourself (you should) or the credit card companies - you cannot escape your personal responsibility and the welfare of your family by ignoring the problem any further.
BadCreditService.com has done the research and talked to the experts to chart an easy to follow course to paying off your credit card debt.
STEP #1. Be honest with yourself: - Can you really do this on your own or do you need the help of a Consumer Credit Counselor? Many people are just not strong enough nor have the self-discipline to get themselves out of credit card debt. Americans have become an "I want what I want and I want it now" type society. Hard work, self-sacrifice and discipline just aren't words in many Americans vocabulary anymore. And did you know that a Shopping Addiction is just as real as an eating addiction, alcohol addiction or drug addiction? Those with a shopping addiction rationalize all kinds of excuses as to why they have to buy something. Many women even use their children (my little boy or girl NEEDS this for such and such) as convenient excuses in order to rationalize purchases.
Whether it's to give themselves a temporary "fix" or to fill an empty void - many Americans numb themselves to other external pains or emotional issues through shopping. Even those who are not addicted to shopping have to admit - spending money on ourselves makes us feel good. But it's an easy trap to fall into. And your enthusiasm today for getting out of debt has to carry you through the bad days when you desperately want a "fix" - or to treat yourself to some new clothes, shoes or a DeWalt cordless drill.
So be honest and ask yourself:
1. Do I shop to make myself feel better?
2. Do I need help to get out of debt?
If you answered yes to both questions, CONGRATULATIONS - you've taken a remarkable first step to emotional and financial freedom. Consumer Credit Counselors can work miracles on your personal finances and credit card debt and most licensed professional counselors (psychologists) charge on a sliding scale fee - meaning, if you don't earn a lot, their fee is lowered so that it is more affordable. (See Step #10, Change Your Lifestyle Habits for more information on Shopping Addiction).
STEP #2. Figure out how much money you owe: - Although this might sound simple enough for those with only 2 or 3 credit cards, we have to list this step for those who have...(wait for it)...(you are not going to believe this)....for those who have 10 to 25 credit cards. Ten to 25? Ouch! For those with 10 to 25 credit cards, they probably don't know the exact amount of how much they owe because A). It's too hard to remember, B). They don't want to remember C). They are in denial or E). All of the above. If you have a lot of credit cards, you need to get all of your statements together, add them up and write them down in your personal budget finance notebook. Which brings us to #3.
STEP #3. Get organized: - Buy yourself a notebook and a calendar where you can keep track of your credit card debt, your interest rates, minimum payments, due dates, phone numbers and balances. You can organize this notebook anyway you want, but write it all down. Writing it down means you have to face it and will remember the important dates and numbers. In case you forget an important point in the future, you'll have your notebook with all the information you need right there - instead of having to dig through stacks of bills to get the due date or balance you need to know.
Now that you have gotten organized and written it all down, you can begin your plan of attack.
STEP #4. How much money are you wasting? Now that you know exactly how much you have to pay and when you have to pay it, you need to find extra money in your income in order to pay it. You cannot get serious about paying off your credit cards unless you make cuts in your spending. And you cannot make cuts in your spending unless you know exactly how much you are spending. Right?
In the beginning of 2006, the Oprah Winfrey show began a wonderful segment called the America's Debt Diet. In that series which profiled 3 families as they struggled to get out of debt, one of the show's Personal Finance experts talked about what he called The Latte Factor.®
If you put just $10 a day towards your debt rather than spending it on fancy cups of coffee, cigarettes, bottled water or fast food, in one year you could put $3,600 towards your debt! Every da, you may be needlessly spending money on little things that you could be using to pay down your debt. Take David Bach's Latte Factor® Challenge form with you everywhere you go tomorrow and write down every penny you spend. (Source: Oprah.com)
Click here for the Challenge Form: Items to write down on that form include: Coffee/Tea, Bottled Water/Soda, Eating out and Fast Food, Cigarettes, Vending Machine Snacks, Candy/Gum, Newspapers/Magazines, Long Distance, Cell Phone charges, Kids Lunches, Gas/Fares and Tolls. (Source: Finishrich Media)
Your goal here is to find a few dollars here and a few dollars there which you can put to better use by paying off your credit cards. If you still need help finding places to save money, check out our 101 Great Money Saving Tips. These are no ordinary money saving tips. We put the best ones together so you can EASILY save $50, $100, $150, to $200 a month on your bills and expenses.
But all the money saving tips in the world won't do you any good unless you stop using your credit card. You've either got to cut it up, or take it out of your purse or wallet and put it away where it's not so easy to get to. "But I need it in case of an emergency!" - Answer: Unless you are on vacation or out of town, there are very few times in your daily routine where you have an actual emergency and need a credit card. The only "emergencies" you've probably had is buying an item that you must have that's ON SALE - and those are the "emergencies" that got you in this mess in the first place.
STEP #5. Plan a budget: When you have a pretty good idea of where all your money for incidentals is going, it's time to get your notebook out (from Step #2) and create a budget which will be your road map for getting out of debt. There's no perfect form that fits everyone's needs and circumstances, but you do need to consider some basic elements if your budget is going to work. An effective budget needs to be:
Realistic: Forcing numbers to work out on paper isn't hard but these numbers need to work in real life.
Concise yet comprehensive: You don't want your budget to have so much detail that you spend all your time updating it.
Flexible: Your budget is a work in process and will change from month to month as annual and quarterly bills are due. You might also find that you estimated too low or too high and have extra money here and there. Your budget will change and evolve from month to month but it's a good idea to have next month's budget prepared and written down one to two weeks before the beginning of the month. (Source: Getting Out of Debt, CliffsNotes)
Important Dates: Remember
to write down the due dates of all your credit cards. If
you ever want to feel as if you've taken one step
forward, and one step backwards - miss a credit card
payment. Late fees can cost you as much as $39. Late fees
account for 1/3 of all the profit for credit card
companies. Do you want to know what's even worse than a
late fee? How about this scenario which gets played out a
lot. You have a credit card with a $2,975 balance on a
$3,000 credit line. If you are late on a payment, the
late fee will take your balance to: $3,014. Okay, so now
you are $14 over your credit limit - BAM! The credit card
company will hit you again with an Over the Credit Limit
Fee which could be another $39. You are now $78 more in
debt because you were late. But it gets even worse. Since
you are still over your credit limit, the credit card
company will hit you with another late fee next month if
you don't pay that $78, plus your current month's fee and
finance charges. And just to let things go from bad to
worse, the credit card company will now assume you are a
higher risk (because you missed a payment and went over
your credit limit) and your interest rates will go up by
several percentage points, and your credit score will go
down. Since you weren't paying close enough attention to
the due dates, you now have 4 new problems.
1. Late fee of up to $39
2. Over the credit limit fee of up to $39
3. Increased Annual Percentage Rate because you are a
credit risk
4. Your Credit Rating Drops
Allowance: If you have a problem with handling money, self-control or saying NO, you need to put yourself on a weekly allowance for all those small items mentioned in Step #4. Adding this item to your budget will give you a firm foundation for future spending control.
STEP #6. Make Larger Payments: When you have completed the steps above, stop for a moment and congratulate yourself because you have now become a highly trained special forces commando when it comes to doing battle against your credit card debt (and we feel sorry for the credit card companies because they will be crushed and not earn as much profit from you.) [..Insert sarcastic laugh here...]
The first credit card you should launch your debt busting attack against is the one with the highest interest rate. That's the one that's sucking the most money out of you and that's the one you need to eliminate first. Take a look at this example from Oprah.com's Debt Diet Challenge to see how paying down more can get you out of debt fast.
| Debt | Minimum Payment |
Interest Rate |
Years |
| $8,000 | $160 per month* ($5 per day) |
16% | 30 |
| $8,000 | $300 per month ($10 per day) |
16% | 3 years 3 months |
* If minimum payment is 2% of balance.
Thirty years to pay off $8,000 in junk you charged on your credit card?!!! And that's only at 16 percent which you would be lucky to get. Most Americans with that much debt are paying 18 to 30 percent APR.
The above illustration is a great example of how Step #6 is the most important step in paying off your credit cards. Realize that steps 1 through 5 were just the tools to prepare you for step #6. Steps 1 to 5 is the ammunition, and Step #6 is the bazooka by which you blast away your credit card debt. You have got to make significantly larger than the minimum payments to get out debt or you will not succeed.
In Step 6 we advise you to go after your largest interest rate credit card with at least double or triple the minimum payments. (If you follow steps 1 through 5 this should be easier than it sounds). However, it's also important to take little steps against your other credit cards which is why you should add just $5 or $10 or $20 extra to the minimum monthly payment on your other credit cards. While this does not sound like much, this little bit will add up as you are beating down the credit card with the higher interest rate with big payments = AT THE SAME TIME. By the time that high APR credit card is paid off, you will be surprised to see how much lower the balance is on those other credit cards as that extra $5, $10 or $20 is applied against the principal. And that's the important point we are trying to make here: paying just the minimum payment due can keep you in debt to your credit cards for 15, 25, 30 and even 40 years. Therefore, you have to go after the principal debt with larger than the minimum monthly payments.
Now, fast forward several years to the point when you have paid off that high interest credit card. When that day comes, take the $200 or $300 payments you were making, and roll them over to your other credit cards. Thanks to the extra $5 to $20 payments you were making, you'll find your balances significantly lower and the extra $200 to $300 will cause your credit card debt to do a REVERSE SNOWBALL. What is a reverse snowball? Well, have you ever noticed how debt seems to snowball, like when you miss a payment in Step #5? The snowball starts out at the top of the hills, and as it rolls down, it gets bigger and bigger and bigger?
The opposite is true when you start to pay down your debt. In the beginning, it will be really slow going and seem impossible. But it is a law of economical physics that as you pay down your debt, over time, it will get easier and easier as your balances due get smaller and smaller. So it's important to remember that when you pay off that first credit card, take those large monthly payments you were making and apply them towards the other credit cards. Don't shrink the payments as a "reward to yourself." - Honestly, you don't deserve a reward for yourself until all credit card debt is paid off.
STEP #7. Do the Credit Card Dance: Nearly all personal finance experts will advise you to try and negotiate with your credit card company for lower interest rates. Wow. They make it sound so easy but if you have ever tried it, it's very, very, very difficult and much easier said than done.
Jean Chatzky, one of the personal finance experts who guest starred on Oprah's Debt Diet series, and author of two personal finance books: Pay It Down and You Don't Have to Be Rich offers what amounts to the best advice for negotiating for lower interest rates. Click here to read Chatzky's Script to Renegotiate your interest rates. Be sure to print it out and have it close by when you make that telephone call.
Other personal financial experts believe that you should transfer your high interest rate credit cards over to another credit card that is offering an INTRODUCTORY LOW APR of 5.9 or 6.9 percent. The "introductory period" on these cards usually last from 6 to 12 months. While BadCreditService.com agrees that it is a good idea to take advantage of these offers when paying off a credit card, - You Have to Be Extremely Careful when doing the credit card dance.
Here's why.
While most financial experts tell you to trade in your high interest rate credit card for a lower one, they forget to stress how important it is to CANCEL your previous high interest credit card. This sounds like a no brainer but many people either forget to do this, or purposely neglect to do this because they have a shopping addiction mentioned in Step #1 and Step #10. Trading credit cards from high interest to low interest ONLY WORKS IF YOU CANCLE THE PREVIOUS CREDIT CARD!!
Another trap that people fall into when they do the credit card dance is they fail to read the fine print on the introductory offer. If you do happen to read that fine print you'll see that if you miss a payment or are late on a payment - the low introductory APR is over with. Kiss it good bye because you defaulted on your agreement. You are now back where you started with a high APR.
The low APR will only help you for the Introductory Period. Duh! But most people forget that 6 months or 9 months or 12 months comes around sooner than you think. So you need to make the best possible use of that time to pay down your principle as outlined in Step #6. Six months can go by in a blink of an eye and you only have six chances (monthly payments) to whittle down that principal. Switching to a low APR credit card is only half the step, making big payments is the second half. You don't win anything or make any progress if you forget that all important step.
If you think you can do the credit card dance and beat the credit card companies at their own game, think about this for a moment. The credit card companies wouldn't make that low introductory APR offer - if they weren't profiting from it in the long run. It's a marketing ploy to get more customers and it's obviously working - or else they wouldn't keep up the strategy year after year after year. That means, in reality, the credit card companies are the ones who are better at the credit card dance than you.
Negotiating for lower interest rates with your credit card company is much more difficult than personal finance experts tell you it is. In reality, you will probably fail the first, second or third time you try it. Be prepared to negotiate like it's a billion dollar oil company merger. Be prepared to be rejected and given the run around several times. We're not saying it's impossible, it is possible, but you will have to tolerate a lot of rejection before you succeed. And if you bypass the negotiation and transfer your balance to a lower APR card, MAKE SURE THAT YOU MAKE IT WORK FOR YOU! Remember that the credit card companies are betting on the fact that you will trip up and fall during your dance. They know the statistics and are counting on you to fail to pay down your principal balance. Prove them wrong, and make the opportunity work for you.
STEP #8. Take Drastic Measures: If you carefully employ steps 1 through 7, then you will undoubtably be on your way to paying off your credit cards in a 3 to 5 year time frame. However, for some people, that is not enough. If you are really agressive about paying off your credit card debt, OR - your debt repayment timeline is LONGER than 5 years you may want to seriously consider taking some drastic measures to reach financial freedom.
If you want to make some lump sum payments towards your credit card debt and you are committed to making some sacrifices, here are some quick turn around ways you can make some money.
Clean out your house and garage and hold a Yard Sale: Go through your garage, your attic, your closets, your storage lockers, etc., and as you look at each item, ask yourself: "Do I really need this anymore and how much can I get for it to pay off my credit cards?" - If you hold a Yard Sale and manage to rake in $400, then congratulate yourself that you are $400 closer to being out of debt. Think of it this way, if you have $8,000 in credit card debt, that $400 represents 5 percent of your principal balance. That's 5 percent of your total amount due that you wiped out in a weekend Yard Sale.
If you live in an apartment and can't hold a Yard Sale (for lack of a yard), then don't despair because you can still have an Internet Yard Sale. You can sell your items on Craiglist or eBay one by one, book by book or dress by dress. Although it will take you more time, you'll probably earn more money selling your used junk online. Remember that one man's junk is another man's treasure and some people will pay top dollar to get their hands on what you consider to be "junk" to you!
Take a hard look at those big ticket items like a third car you don't need, an old motorcycle that hasn't been ridden, or a boat that hasn't seen water in 2 years.
Are your car and insurance payments getting in the way? Think about trading in that Lexus or Escalade for a car that is not only cheaper on monthly payments, but also gets better gas mileage. The new Honda and Toyota hybrid cars can get up to 50 miles per gallon! If you are getting 12 miles to the gallon with that big SUV you bought 2 years ago, maybe it's time to do your pocketbook and the environment a favor by trading it in for a hybrid.
Force your kids to step up to the plate. While some people would scoff at the idea of forcing their children to make sacrifices, you aren't doing them any favors by NOT teaching them financial responsibility. If you are paying out $150 a month in car payments for your teenager's car, and another $100 a month in insurance payments, then teach them a life lesson about hard work and sacrifice by telling them they'll have to pay the insurance premiums, or half the car payment or both. While it might sound cruel, this tough love about life and financial responsibility will do them more good in the long run. Afterall, do you want to see your children coming back to you at age 28 expecting you to pay their bills because you didn't teach them how?
By now, you might have a few ideas about how you can take some drastic steps to come up with cash to pay down your balance. However, we are also going to tell you What Not To Do to Pay Down Your Debt.
Some personal financial experts advise you to take out a home equity loan, and use that lump sum to pay off your credit cards. BadCreditService strongly advises against this move and personal finance expert Deborah Fowles, Financial Planning expert for About.com, outlines why home equity loans for credit card debt is a bad idea:
Credit card debt is unsecured debt, meaning there are no assets backing it up that the lender can come after if you fail to pay what you owe.
A mortgage, Home Equity Loan, or Home Equity Line of Credit (HELOC) is secured debt. Your home is the collateral. If you don't pay according to the terms of the loan, the lender can seize your home as a way of obtaining payment.
You can get in trouble with Home Equity Loans and Home Equity Lines of Credit if a job loss, illness, divorce, death in the family, or other event makes it impossible for you to keep up with the loan payments. The lender can then force you to sell the home in order to repay the loan. When you do sell the home, you may not get what you owe on it, depending on market circumstances.
Pretty good reason, huh? Other financial experts will also tell you to use your 401(k) to repay down debt, but this is another dumb idea. For one thing, there are no quick and easy solutions to credit card debt. Going through the sacrifice, pain and hard work of paying them off will teach you life lessons that quick and easy solution like a 401(k) cannot. If you use your 401(k) to pay down your credit card debt, you will avoid those hard lessons and will in all likelihood be back in credit card debt in another 3 years with another $9,000 balance due but this time - YOU WON'T HAVE A RETIREMENT FUND TO BAIL YOU OUT!
BadCreditService.com maintains that it's better to adopt the point of view that our depression era grandparents had and that author Robert Manning pointed out above: hard work, sacrifice and self-discipline is a superior mentality to have than the - instant gratification, quick fix, give it to me now without working for it - attitude that pervades modern American society.
Besides, Deborah Fowles points out a practical reason why cashing in your retirement fund is a bad idea:
Taking out a 401(k) loan is another bad way to pay off credit card debt because of the tax consequences.
Your contributions to your 401(k) are not taxed at the time you make them, but when you repay a 401(k) loan, you're making the payments with after-tax money. Later, when you withdraw the money for retirement, it will be taxed a second time. Being taxed once is bad enough. Being taxed twice is not a good financial move.
Another drastic step that many personal finance experts recommend is to cut up your credit cards. Which ones to cut up and which ones to spare are up to you, but it's a concept that requires your serious consideration.
Before we wrap up this important step on drastic measures you can take to reduce your debt, we have to mention the possibility that you might need to get a second, part time job. While you are probably working hard enough as it is, and as unpleasant as it sounds, an extra $200, $300 or more from a part-time job can be the nail in the coffin for your credit card debt. And you are not alone. According to the Bureau of Labor Statistics, 8.5 million Americans are working a second job as well in order to meet the cost of living or pay off debt.
If getting a second job is not an option because you are a high flying career type, then look for ways you can earn more money from your job - whether it's a raise, overtime or performance bonus.
STEP #9. Get Your Immediate Family Involved: This step is often over-looked by most financial experts because the impact of this statement is not always tangible. However, unless you have your spouse and children on board, your entire master plan to get out from credit card debt might be more of an uphill struggle then you can possibly imagine. All this work, sacrifice and self-discipline you undertake to pay off your credit cards is ultimately for the benefit of your entire family. Your financial well-being is their financial well being. Therefore, it's only fair that everyone gets on board with you. Here's why:
In order to make a life-changing plan like this work, you need the support system of your entire family. When you are feeling tired, weary and like you can't go on, look to your children or spouse to pick you up and offer encouragement.
Likewise, when a family member is attempting to sabotage your credit card debt elimination plan, you can refer to your budget, your notebook, your payment plan as a testament that's written in stone. That testament will be a firmer foundation for your "NOs!" when your kids are begging you to buy them this or that, or your husband brings home brochures for a new pick-up truck he doesn't need.
If your household is the average American household of husband, wife, and 2.4 kids, then getting into this situation may have been boiled down to everyone sticking their fingers in the credit card drawer. While assigning blame is counter-productive, paying off the credit cards that got your family into this situation is now EVERYONE's responsibility, and should become everyone's priority. Although you probably don't expect your children to contribute their baby sitting or paper route money, you can expect them to make sacrifices in their wants, needs and demands. If they want more out of you than you can afford, you will have to law down the financial law and turn them around from the give it to me now, instant gratification attitude. Self discipline, sacrifice and hard work never hurt anyone.
Sit your family down and talk to them about the notebook and budget for paying off the family credit cards. Explain to them the sacrifices and spending cuts you expect the ENTIRE family will have to make to get out of debt. Chances are, they'll understand and even cooperate in your efforts. Print out copies of this 10 Step Plan for your entire family to read and also make photo copies of your monthly budget from your notebook and post it up in key places around the house where it can be seen, remembered and it's significance felt.
Step #10: Change Your Lifestyle Habits: Paying off you credit card will mean nothing unless you address the personal issues that caused you to spend too much in the first place. As we mentioned in Step #1, you have to be honest with yourself, dig deep down and discover if you have a shopping addiction, lack self-discipline, or find it hard to say NO to yourself or others. If you can admit you have spending control problems, then don't worry because it is fixable. Defeating yourself with statements like: "Well I am that way and there's nothing I can do about it" - is counter-productive. Self improvement, whether it's managing money or quitting smoking, should be on everyone's radar screen and within their realm of possibilities.
"You can only go on sheer willpower for only so long. To be really successful for the long term, you have to change the patterns emotional as well as financial - that helped you get into debt. Rather than being a matter of giving things up, change is a matter of pursuing new things, enriching your life, and avoiding old traps." (Getting Out of Debt, Cliffsnotes, 1999)
Since we are talking about a Lifestyle change, a fundamental shift in attitudes and beliefs, the scope of the problem is too large to cover here. Therefore, we'd like to refer you to this list of internet resources and books where you can find help and support to becoming money smart.
Websites:
America's Debt Diet: Why Do You Shop Self-Assesment - Oprah.com
How to manage compulsive shopping or spending addiction - Indiana University
Debtors Anonymous - Recovery from Compulsive Debt - Debtor's Anonymous
Shopping Spree, or Addiction? - WebMD
Books:
All of the books listed below can be purchased new on Amazon.com
or used for which most of them sell for less than $10.
You Don't Have to Be Rich: Comfort, Happiness, and Financial Security on Your Own Terms, By Jean Chatzky
The Ten Commandments of Financial Happiness : Feel Richer with What You've Got, By Jean Chatzky
Overcoming Overspending : A Winning Plan for Spenders and Their Partners By Olivia Mellan
Addicted To Shopping: ...And Other Issues Women Have With Money, by Karen O'Connor
Currency of Hope, By Debtor's Anonymous