For all of you out there who are in trouble, I have decided to write 5 Ways to Get Out of Credit Card Debt after going through a tough experience with credit cards. I have been through times, when I became six months behind and debt collectors were calling my house many times a day. Being at the brink of bankruptcy and debt settlement has forced me to change the ways I manage and appreciate money. Currently all of my 3 credit card debts are under the limit, and the fees, penalties, and phone calls have stopped. This was accomplished without the help of lawyers and third party agencies /debt settlement agencies.
I realize that some people may have an enormous amount of debt from medical bills or some similar circumstance. This article won’t apply to everyone. I try to detail a few simple ideas and habits that I hope will assist you in your endeavor. The methods I have used are for the average person who has just borrowed their way into financial red ink. By May of 2005 I had accumulated roughly $18,000 in credit card debt and was taking a serious look at bankruptcy. Between this and other debts I had incurred, I was unable to meet my minimum payments. My monthly income and expenses looked like this:
Gross Income $4,200.00 and Net Income $2,700.00 (After Taxes etc.)
There is a problem with having a monthly budget that leaves you nothing at the end of the month – unexpected expenses! There are always things in life that pop up that are unexpected and unplanned. This puts you in a position where you don’t have enough money to pay all your bills. Once poor decisions bring you here, you’re finances are like a car driving off a cliff – you’re not in control and it gains momentum on the way down. Getting here may have been easy, but escaping with good credit will prove hard.
The following are the best ways I know to turn your life around and regain control of your finances – hope this helps.
1- DON’T INVOLVE A THIRD PARTY OR FILE BANKRUPTCY
When all the money you make each month isn’t enough to pay your minimum payments it can be quite disheartening. I remember in the summer of 2005 not being able to make ends meet and not sleeping well. My phone was ringing off the hook from bill collectors and I was extremely stressed out. It really seemed as though there was no way out. The real problem was that I didn’t know what my options were.
Filing Bankruptcy is bad for a number of reasons. First and foremost, it means your going back on your word. If you aren’t the type of person that is interested in honoring your commitments then this article isn’t for you. By all means – go ahead and give your money to some lawyers. But if honoring your word means something to you, then relax and take a deep breath, everything is going to be O.K.. Bankruptcy is bad. You’ve seen the loan applications that have that question Have you ever filed bankruptcy? It doesn’t specify in the last seven years. So once you go down that road, you’re branded as untrustworthy or High Risk. Don’t get me wrong. Eventually your credit score will improve and you’ll be able to borrow money again. But bankruptcy should be the last option – only after you’ve honestly tried every other available option and failed.
Perhaps you’ve seen the commercials on television. Some nice financial do-gooders who are going to help you lower your monthly note while at the same time settling your credit card debts for a fraction of what you owe. It seems like such a wonderful idea. Basic premise: you save money while sticking it to those BMW driving Bank CEO’s. In other words, you should be aware of what kind of bottom dwellers you are dealing with. I have to give this subject some extra attention. Bankruptcy and settling your credit card debt is a large part of the problem driving today’s high credit card rates. After I failed to pay Bank of America and Citibank for three consecutive months my interest rate went from 21% up to 32.6%. This is called the default rate and is applied to a customer when they become High Risk. Believe me I was angry and wrote them letters requesting it be lowered. Of course they didn’t and looking back I don’t blame them.
Basically the Bank is using me to settle the score against the people that do in fact file bankruptcy or settle their accounts. Since they are losing money by loaning to those High Risk customers they need to recoup it from others. Hence 32.6% default rate. The Banking sector in today’s U.S. market is without a doubt one of America’s most profitable endeavors. American culture has convinced everyone that they need anything they want and now (when they can’t afford it) instead of later (when they could afford it). Banks are not all bad. They keep this monster machine rolling. People can build houses and buy cars because of banks. Our economy is dependent upon them and they should be profitable. This doesn’t make me feel all good inside either but it’s still what makes the cookie crumble. The point is that this default rate is necessary. Not to mention that it wouldn’t be my problem if I had been more responsible in the first place.
The problem with using the financial do-gooders is that they fail to mention the negative consequences of using their service. Back in the summer of 2005 I called one of these companies I had seen advertised. A person answered the phone and asked me some questions about my income and my bills. In 3 minutes she had concluded that I was eligible to be in their program. It happened so fast I felt like I was another victim of a high pressure sales presentation. Under the guidance of their opportunistic lawyers I would pay their company $600 per month. Of this $600 they would keep $60 for themselves (handling fees?) and the rest would go into an account which they would watch over for me. When this account had reached a certain amount, they would make the first Bank an offer. For example, I owed Bank of America $6,800. Once my account has about $3,500 they make Bank of America an offer to settle at roughly 50%. It becomes a bargaining game as Bank of America shoots for a higher percentage. These lawyers (negotiating on my behalf), tell Bank of America that if they don’t take the offer then this money will be offered to Citibank as a settlement and they might accept it. This means that Bank of America may be looking at another year or two before they get another offer from me the client! If you are like me then you’re probably asking yourself ‘Why can’t I just do this myself and keep my money?’ You can!
What’s bad about this is that you’re now giving money to a third party that could be applied to your debts. And this third party now has ALL of your money. Does that sound like a good idea to you – someone else having all your money? In the package that these lawyers sent to me, it described the manner in which I could confiscate my funds away from them, if in the course of things, I changed my mind and wanted my money back. From what I can remember reading it didn’t sound like fun. Also, while all of this is going on, your credit history and score suffers. And even once the balances are settled, you’re still left with a gaping hole in your credit report. This means that on future loans you’ll pay a higher interest rate. Paying a higher interest rate on future loans will prove more costly than paying what you owe and salvaging your credit now. Not to mention, while your money is growing in their account the interest and fees are still being charged to the money you owe Bank of America. So what started out as $6,800 one year later is now $10,220!
Once I received this packet of information (which I paid $50.00 for) I realized there was even more for me to worry about. It stated that monies I owed Citibank could not be settled – so I would still owe Citibank the full amount. It was actually an AT&T Universal credit card. But as it turns out, Citibank had bought them out some time ago. These professors of law and good will didn’t tell me this – I found out about it on my own
That was it for me! I made a point not to entertain third parties. Not only do they make your life worse, but all of them are profiting off your ignorance. Take a look at www.ClearDebtSolution.com, a website that specializes in this type of service (debt settlement). Their FAQ’s page is refreshingly straight forward and reveals many of the problems associated with debt settlement and bankruptcy.
2- YOU NEED TO GET SERIOUS ABOUT YOUR CASH FLOW
If you’re reading this then you’re probably in trouble already. The first step towards regaining control is proper accounting for every single cent you earn. You would be surprised how many people honestly don’t keep a track of where their money is going. There was time when I did not care about keeping up with my cash flow and guess what happened – I bounced checks. So I can’t pay all my bills and on top of that now, I have bounced checks with fees that I already can’t afford.
I prefer Microsoft Money. This can be downloaded from the Microsoft Money website at http://www.microsoft.com/money/order.aspx (Order Microsoft Money Essentials)
This will cost you $19.99 and is the only money that I will suggest you spend. It’s well worth the twenty bucks and is easy to use. With this program you can keep up with all your income and expenses accurately. By using this program I always know exactly how much I have in the bank at all times. This program will also show you a monthly report of your income and how much money you spent in each category. Knowing where your money is going is the first step in controlling your cash flow. Every couple of days I sit down and open Microsoft Money. I check my banking online to see if I have had any deposits – if so I put them in. Every time I buy something I get a receipt and put the amount into Microsoft Money. It’s easy to use. Developing a working budget and analyzing your spending will help you save dollars. These dollars are applied to your credit card debt. Spending twenty dollars may make you cringe, but it’s the first step towards gaining control and understanding personal finances.
3- START USING CASH TO BUY THINGS
When you use cash you literally see your money leaving your wallet. This has a psychological effect. I mean it almost hurts when you watch that money leave your hand. For those who need tough discipline, I recommend you should start putting your cash into envelopes. You have a separate envelope for each spending category. At the beginning of the week go to the ATM and withdraw your budgeted cash for the week. Then sit down and put the amounts per category into the envelopes. This only works if you don’t spend more than what is in the envelope. This really helps people learn to control their spending and stick to the proposed weekly budget.
4- FIGURE OUT HOW MUCH CASH YOU HAVE ACCESS TO
If you’re like me you probably need as much money as you can earn and find. Let’s think about some ways to free up some cash you may have not considered. When I finally reached the end of my rope financially I had been with the same job for seven years. $1000 per week was my salary and was the best money I had made by the age of 30. Although I had a college degree I lacked specialized skills for the job market. Fear of quitting my job and the unknown aftermath was part of the problem. In order for me to rectify my credit in the time I wanted, more income was necessary. First of all, see if there are physical items or services that you can do without. Here is a list of things that you might be able to live without.
Telephone (land lines and cellular)
Cable TV or Satellite
Furniture or appliances
Pets
Video games
Musical Instruments
Real estate
Vehicle
This list can be much larger. However, these are some of the things that you can stop using (services) or maybe even sell for needed cash (physical items). I recently went on www.ebay.com and auctioned off everything in my house that I really didn’t need. Some of the items were musical instruments and video games – even some books. Just make sure that you charge the other party enough shipping or you will lose money there. I sold an electric guitar by advertising in the local paper. As it turns out I had more cash at hand than I realized!
5- MANAGING YOUR DEBTS ONE BY ONE
The hard truth may be that you can’t fulfill all of your financial commitments according to the loan agreement. Realize this and move on! For me, reaching this conclusion was the hardest part of this process. It was frightening because I didn’t know what would happen when I broke the agreement. Try to relax and take a deep breath, everything is going to be O.K..
Sometimes you just have to be creative. I had two vehicle loans and only needed one car. My father, on the other hand, was driving a ten year old Mazda B2200. Conveniently he just turned 62 and his Social Security checks began coming in. I didn’t have enough equity built up in either vehicle to sell without having to come out of my pocket. So I convinced my father to sell his old truck and take up the notes on mine. This is what we did and that freed up $300 per month, and Dad looked great in his newer Ford F-150. That helped. My student loan was financed through Sallie Mae. They have a deferment program where you can put off making monthly payments if you’re in financial trouble. So I took a 6 month break from paying them – during which time I consolidated my student loans and am currently only paying $120 per month. I would like to pay more but the consolidation loan has a much lower interest rate than BOA and Citi – they are at 32.6% remember?
I owed 11 more payments on my Mitsubishi. Since I had to have a car I decided to pay that off first. I decided to continue to pay Discover Card (for some reason they kept a lower interest rate – today 28%), and as for Bank of America and Citibank – they received a letter. Here it is:
June16, 2005
Account: XXXX XXXX XXXX 1664
Bank of America Representative:
Due to my financial situation I must request at this time that my account be closed. I am trying to avoid bankruptcy and am unable to meet my minimum payments. In a few months, we should be able to work out a payment plan that is satisfactory to us both. Please refer to your records and review the amount of money your bank has made from me in finance charges and fees. In closing my account, please omit further finance charges, interest, and fees. I look forward to satisfying this debt, at a later time, in a manner that is fair and reasonable. Please do not call my work, as it may jeopardize my job.
Current debt: $7,279.25
Best regards,
Unfortunately for me, they didn’t agree to omit further charges, interest, and fees. However, I lived in the disaster path of Hurricane Katrina. Because of this I received 6 months interest and fee free. It kicked in September 2005 through February 2006. This saved me about $3,200 in interest – one good result from that storm. Since I was no longer paying BOA and Citi, I saved 2,000 in 45 days. Some of that was saved and some came from selling things I didn’t really need. Once I had $2,000 in the attic, I decided to quit my job. I began asking myself how much trouble came my way because I carried around fear of the unknown and I was about to strangle my boss. So here I was jobless – and with a huge amount of unsecured debt. Within 8 days I had a new job making even more money and working less hours. I couldn’t believe it, my life had somehow improved! Please understand that I’m not suggesting that everyone go out tomorrow and quit their job. Like commercials say results will vary. I’m just trying to make the point that life out there in the unknown wasn’t nearly as dangerous as I thought it would be.
By Christmas 2005 I had saved $5,000. It was truly hard to believe. By this time I owed $3,500 on the Mitsubishi Eclipse. So I paid the car off in full. By paying off the car and having my father pick up the truck note, I had $800 per month more that I could apply to my credit card debt.
I began the process of climbing out of the hole in March of 2006. By that time the $18,000 I owed had grown to $22,000. I needed a way to determine how much I needed to pay per month to hit payoff in 20 months. So I used a spreadsheet which you may download http://www.carbuyingtips.com/loancalc.xls .
By using this spreadsheet you can see how long it will take you to pay off your credit cards. It also tells you how much of what you eventually pay is interest. For me to pay off $22,000 in 20 months I actually end up paying back $28,224. That means that in 20 months the banks make $6,224 in interest off me. It’s a sickening feeling when I think of how desperately I could use that money right now. At the time of this article I am 8 months into the program. I pay $1,400 per month on my credit card debt. I’m running out of clothes and for my vacation last month I stayed home and tried to find more things I could sell! I’ve had to put off taking trips and going out to dinner. My wedding date is in fact, planned a few months after all of this will be over. Basically, for those of us in a prison of debt, life is on hold. Everyday I start sentences with When this is over……. Luckily for me it’s only 12 months away. The light at the end of the tunnel is now within my view.
Perhaps when this is over I will remember the struggle it requires to escape the reckless spending of a young man in his twenties. I vow not to make the same mistakes twice. But most importantly, I’ve kept my word, honored my commitments, and salvaged my credit report.
If you fail to manage your debt properly and fall in debt the best solution is Debt Settlement. Debt Settlement Services.