How To Not Suck… At Getting Out Of Debt

You’re in debt and you know it. But (a brief pause, while I invoke my inner Jersey) whaddya gonna do about it? Credit card debt can seem like a never-ending spiral. As you try to pay it down, more interest charges accrue, and it seems your balance isn’t getting anywhere. Stop the bleeding already so that you can ultimately get back in the black.

You’ll need to slam the brakes on your runaway debt before you can even think about turning your situation around. Here are some ways how:

Start carrying cash
It’s simple. Use cash. If you don’t have the cash, don’t make the purchase.

I almost never carry cash. That makes me a serial user of plastic, but I don’t usually use credit cards, opting instead for a debit card. If I don’t have the money in my account, I can’t spend it.

If you use a debit card instead of a credit card, watch out for overdraft fees. If you have overdraft protection on your card, turn it off. And remember that debit cards are not appropriate for every kind of purchase.

There are also prepaid debit cards, but be sure to read the fine print and watch out for the fees, as some cards tack on fees — for everything from depositing money to customer service calls — that can quickly add up.

Stop carrying your cards
If you don’t have plastic in your wallet, it’s difficult to make those impulse purchases at the store.

There’s no use leaving your cards in a place that’s convenient. There’s the old freeze-it-in-a-block-of-water trick. Take a paper cup, old wonton soup container or Tupperware, fill it with water, add your card and stick it in the freezer. An icy block is by no means impossible to crack (or melt), but it will make you pause before using credit, and sometimes that’s all that it takes.

Negotiate the interest rate
Let’s talk numbers.

If you have a $1,000 credit card balance on a card with 18% interest, and you pay only the minimum, it will take you 113 months and $923 in interest charges to pay it off. That’s more than nine years — and it’s assuming you don’t make any additional charges on that account.

But if you can get your lender to lower your interest rate to 14%, you can shave almost a year off that repayment schedule and save more than $250 in interest.

We’ve written before about how to reach out to your credit card company to ask if it will lower your interest rate.

It also won’t hurt to come armed with these haggling tips.

Before you dial, look online for the national interest rate averages for your type of card. Websites like BankRate.com, Credit.com, CardWeb.com and CreditCards.com should have information on comparable cards.

Then make the call, and nicely explain to the rep that your card has a higher rate than the national average, and ask if there’s something they can do.

If they refuse, explain — again, nicely — that you’re trying to pay down your debt and you’ll be able to pay it off earlier if they would lower your rate.

If the answer is still no, you can threaten to take your business elsewhere… which gets us into balance transfers.

Consider balance transfers
If you can transfer your credit card balances to a low- or zero-rate card, all the better.

Again, sites like BankRate.com, Credit.com, CardWeb.com and CreditCards.com have tools to find and compare cards for customers looking to transfer balances.

Before you make a move, be sure you understand the fee for balance transfers, and know how long your new interest rate will last. Six months of zero interest is better than none, but be prepared for a hike in your monthly costs when the introductory offer ends. Additionally, if you make any purchases on that new card, payments will likely be applied to these purchases before the transferred balance is paid down. Your goal needs to be to get the balance down to zero by the time the promotional interest rate ends. Otherwise, you’re just delaying your debt instead of repaying it.

One final word of caution about balance transfers: Sometimes the fees on balance transfers effectively negate the savings you might have had on keeping the debt on the old account.

Before you sign on for a balance transfer, try to negotiate an even better deal.

After you transfer the balance, do not fall into the trap of starting to charge again just because that card’s slate has been cleaned. You still owe the same amount — it’s just on a different piece of plastic.

Limit your credit
Cancelling your credit cards will stop you from using them, but that could hurt your credit score because part of that score is a ratio of your available credit to your outstanding debt. The more debt you have compared to your available credit, the lower your score.

Your credit score is also impacted by your length of credit history. If you cancel a card you’ve had for years, that could also give your score an unwanted ding.

A less bold move is to ask your credit card issuer(s) to lower your spending limit. This will also impact your score, but less so than cancelling a card.

If you do lower your spending limit, make sure you don’t open yourself up to over-the-limit fees by adding new charges or letting your interest charges accumulate.

Of course, if you’re deep in debt, there’s a chance your credit score has been dinged more time than the dinner bell at a dude ranch. If you’re in debt, you need to worry about clearing your balances first and foremost. Once you have shown the credit card companies and the banks that you are responsibly paying down your debt, your credit score should begin to improve.

Pay more than the minimum
Paying the minimum won’t cut it. Your debt will stay with you for years and years, and you’ll pay more in interest charges over time.

Let’s say you have a $2,500 balance on a credit card that charges 14% interest. Paying only the minimum means it will take you 195 months — that’s more than 16 years — to pay off, and it will cost you $2,416 in interest. That’s basically paying double for those shoes, tacos and movie tickets. Raise that amount by only $15/month and your balance is paid off in 75 months (six years, three months). Pay double the minimum and the debt is gone in under four years and you’ve saved a ton of interest.

To see how long it will take to pay off your cards if you only pay the minimum, try the calculators offered by BankRate.com.

Temporarily divert extra money
To find extra money to put towards your credit card balances, get drastic. It’s temporary, and it’s worth it.

Start by giving your budget an overhaul. Cut back on (or eliminate) your cable package, eat at home for a change, and if you must go see a movie, make it a matinee. You get the picture.

There are online budget tools on many sites, including BudgetTracker.com and BudgetPulse.com, that can give you some ideas on where to save.

But remember that when you’re in debt, money saved by trimming your budget is not money that can be spent making purchases. So when the savings come in, move the extra cash to pay down your credit cards or other outstanding debt.

If you can cut spending by $50 a month and redirect that money to your credit card balance, you’ll save a bundle. Remember that $2,500 balance at 14% interest that would take a decade to pay off? Adding $50/month above the minimum payment means you’d pay that entire debt off in 29 months with only $451 in interest charges — thousands less than you’d have paid out otherwise.

There are other ways to free up cash.

If you’re saving for retirement in a 401(k) plan, you may want to consider suspending your contributions and redirecting those funds to pay off your debt. The interest charges on your balances are probably higher than what you’re earning on your savings, so it could be a worthwhile temporary move.

Make sure to restart your contributions once the debt is paid off. This is not intended as a permanent solution, as halting your 401(k) now will only come to bite you on the butt when retirement comes.

Next, get creative. Instead of holiday or birthday gifts, ask for cash that you can send to your credit card. Have a garage sale and send off the money to your creditors. Or get a part-time job and use your earnings only for debt payback.

Maybe you can get a job in a place you already shop — like your supermarket — so you can also save money on purchases with an employee discount.

Get help
If you still need help paying off your debt, consider enlisting the help of a free or low-cost credit counseling service. You can find one here at nfcc.org.

Also make sure you understand what debt collectors can and cannot do.

For some inspiration, see how one couple used a debt management plan to pay down $83,000 in credit card debt.

Then, get cracking on your debt repayment plan.

And just to keep the mood light, take six minutes and 13 minutes out of your life to charge your sense of humor:

You can read Karin Price Mueller’s stories for The Star-Ledger at NJ.com, follow her on Facebook, and on Twitter @kpmueller.

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