Drowning in the Sea of Credit Card Debt Tips for Getting Out of Debt and Staying Out 19 TAC Chapter (b) (1)

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1 Drowning in the Sea of Credit Card Debt Tips for Getting Out of Debt and Staying Out 19 TAC Chapter (b) (1) Millions of Americans have set sail on the Sea of Credit Card Debt with good intentions but ended up capsizing and fighting a tidal wave of debt. There are numerous reasons Americans get into debt -- whether it s loss of a job, an extended illness, not setting a personal budget, or impulsively straying from that spending plan. Whatever the reason, getting out of debt and staying debt-free are the focuses of today s presentation and the goals for less financial stress. I m going to share 10 steps you can take to get out of debt and stay out. How much debt? Let s start with talking about how much debt is too much. Generally, CPAs recommend carrying only one or two major credit cards, using them sparingly and not getting in over your head. Another general rule of thumb is limiting your non-mortgage monthly credit payments to 15 percent of your take-home pay. Step #1: Add it up! It might be a gruesome picture, but you can t get out of debt if you don t know how much you owe. Calculate how much you owe and to whom. Make a list. Write down the total amount you owe, the interest rate you re being charged, and the minimum payment you need to make. It may seem overwhelming, but this is the first step to taking charge of your debt. Step #2: Start with the highest balance. To quickly pay down your debt, a good strategy is to target the balances with the highest annual percentage rates. For some, paying off low-balance cards first seems more rewarding since you quickly see progress. Regardless of which approach you use, you ll become debt-free faster if, once you pay off a credit card, you apply the money you were paying on it to your other credit card balances. Step #3: Pay more than the minimum due. You just couldn t pass up the hot pink chenille sweater two winters ago. Chances are, the sweater is in the back of your closet, still sporting the tags. With the amount you ve paid in interest fees, you could have purchased three matching berets and the coordinating scarf by now. To avoid paying for an item several times over in interest, pay more than the minimum due each month. According to the Cambridge Consumer Credit Index, 47 percent of Americans with credit card debt make only the minimum payment each month. Low minimum payments are a trap credit card companies use to collect interest for years. Don t be a statistic! Look for ways you can curb your spending on other items to add to your monthly debt payments. Find ways to pay more than the minimum amount, even if it s only $20 dollars more. And remember, no extra amount is too small. By increasing your monthly payments, you ll save yourself hundreds, if not thousands, of dollars in finance charges. Step #4: Restructure your debt. Consider switching your credit card balances to a card with a lower interest rate. If you choose a card with a low introductory rate offer, try to find one that remains effective for at least a year. Or

2 better yet, call your current issuer and ask for better terms. Many credit card companies will adjust your rate downward rather than lose you as a customer. Read your credit card agreements. Did you know that in most states, credit card companies can change the terms of your credit card holder agreement with just 15 days notice? To avoid finding yourself suddenly subject to new credit card terms, educate yourself by carefully reading the fine print in the flyers periodically inserted in credit card statements. Check the interest rate. Does your card offer a grace period? The grace period is the time between when you charge a purchase and when you begin to pay interest on that charge. The standard is 25 days, but some credit card companies are reducing that number. If your credit card company does not offer a grace period, you will pay interest on your purchases, even if you pay your balance in full each month. What about late payment fees? You probably know that credit card companies assess penalties for late payments. But you might not realize that, with some cards, your payment has to be received not only by a certain date, but also by a certain time, such as 5:00 p.m. or the close of the business day EST, in order to avoid a late fee. Check your agreement to see what date and time your payment is due and be sure to allow sufficient mailing time. Before transferring a balance to your credit card, ask if there is a fee. A balance transfer fee can often wipe out any interest rate advantage. If you read your credit card agreement, you may find a clause stating that your credit card company reserves the right to raise your interest rate if it finds you have been late paying other bills. Yes, lenders routinely scan credit reports, and if your payment to one company is late, you may find your APR has increased on credit cards totally unrelated to the company that received the late payment. So, pay all of your bills on time. Step #5: Look into home equity loans, savings accounts, and 401(k) plans. For anyone who owns a home, a home equity loan or line of credit is likely to be the least expensive source of credit. For most taxpayers, using a home equity loan or line of credit to pay off higher-rate credit card balances means not only lowering the interest rate, but also converting nondeductible personal interest into tax-deductible mortgage interest. If you fail to make payments on a home equity loan or line of credit, you can lose your home; so, use this option only if you re sure you can meet the payments. Take money out of savings Yes, it s the sacred reserve for retirement or your child s college education. However, your credit card interest rate is likely higher than anything your investments will bring home. Paying off an 18 percent credit card balance is equivalent to earning a risk-free double-digit return. The higher the interest rate on your debt, the better repayment versus investment sounds. Pay off your debt and then re-invest in your savings account. Borrow from your 401(k) If you re reluctant to put your home on the line, borrowing against your 401(k) plan is another option. The downside here is that retirement plan loans generally require full repayment within five years, and if you should leave your job, you ll need to pay back the loan or else have the outstanding balance treated as a taxable distribution. You also may have any interest you pay go right back into your own account.

3 File bankruptcy only as a last resort Bankruptcy should be reserved as the absolute last resort for dealing with debt. Your credit report will reflect your bankruptcy for 10 years making it difficult to get credit under affordable terms during this time period. Chapter 7 and Chapter 13 are the two forms of personal bankruptcy relief. A new bankruptcy law went into effect Oct. 17 made it more difficult for consumers to file for bankruptcy. Anyone with income above a certain level has to work out repayment plans with their creditors. Under the old law, debts would be erased. That s not always the case anymore. Step #6: Get rid of the cards! There s little reason to have more than two national credit cards. Use one to charge all your purchases and keep the other in reserve. Since most department stores will accept any of the major bank credit cards, there s little reason to have store charge cards, many of which charge interest rates in excess of 20 percent. If you have credit cards you no longer use, contact the issuer and arrange to close the account. Too many open credit cards even if they have zero balances may cause a lender evaluating your mortgage or other loan application to question what would happen if you ran up balances on all of them. Better yet, use a debit card when making purchases. It works just like a credit card, but a debit card automatically deducts the purchase price from your checking account. That forces you to think before spending, and means you ll know how much you can spend and how much you can t. And best of all, there s no bill at the end of the month and no interest charges. Step #7: Protect your credit history. Whatever you do, make all of your loan and credit card payments on time. If for some reason you can t make your monthly payment, contact your creditor to explain the circumstances. Most creditors are willing to work with you. Remember to check your credit report from time to time to make sure it s accurate. Thanks to a new law, you can get a free copy of your credit report from each of the three national credit bureaus each year by going to Consider spreading it out by ordering one credit report every four months. The three credit bureaus are Equifax, Experian and TransUnion. What to look for when reviewing your credit report Begin by verifying the accuracy of the report s identifying information such as your name, Social Security number, current and previous addresses, date of birth, and employment history. The main section of your report contains credit information about your accounts with banks, retailers, credit card issuers, and other lenders. The credit information section typically includes the account opening date, your credit limit or loan amount, outstanding balance, monthly payment, and payment record over the past several years. Your report will also reflect delinquent accounts that are referred to a collection agency. Another section of the report includes public record information such as bankruptcy records, monetary judgments, and tax liens.

4 Inquiries, or the names of those who requested a copy of your credit report over the past year, will also be identified. Positive information remains on your report indefinitely. Most negative information remains for up to seven years, and bankruptcies remain on your credit report for up to 10 years. Be sure to go through the entire report, entry by entry. You have the right to dispute any information in your report you feel is false, incomplete, or obsolete. Inform both the credit bureau and the creditor who reported it of any errors. You can file a dispute online, by phone, or in writing. A letter should include your complete name, address, date of birth, and Social Security number, in addition to details concerning the disputed information. Send your request via certified mail, return receipt requested. Once you challenge any information, the credit bureau is required to contact the creditor and request that the creditor verify the information. If you disagree with the findings, you can file a short 100-word or less statement giving your side of the story. Future reports to creditors must include this statement or a summary of it. Don t fall for credit repair scams. There s no quick fix for repairing your credit record. Don t believe anyone who tells you otherwise. Only time, effort, and an effective personal debt repayment plan will improve your credit report. Step #8: Set (and stick to) a budget. What s the point in climbing out of debt to wind up mired in financial stress all over again? Learn your lesson and set a personal budget to avoid overspending. Track your spending You can t change the past, but you can change how you manage your money in the future. Thus, the first step in taking charge of your debt is making sure you know where your money is going. Divide your expenses into categories, such as mortgage and utilities, insurance, food, transportation, and entertainment. For a month, track how much you spend in each category. Compare your expenses to your income to estimate how much can be realistically allocated to repaying debt each month. Make sacrifices It is always possible to live more frugally if you are willing to make sacrifices. Watch for ways you can cut expenses. For example, take your mid-morning latte break to the corner coffee shop. Instead of spending $4 for a lukewarm latte, hit the office coffee pot instead and chat it up with colleagues. Bring your lunch to work. Trim your entertainment budget. If it s practical, take public transportation instead of buying a car. At today s gasoline prices, that could save you a bundle! You may have to make some behavioral changes in order to stick to your new budget. If you re a chronic impulse shopper, you may need to freeze your credit cards in blocks of ice so the impulse to purchase passes before the ice thaws. A less extreme measure may be to run through a mental checklist before hitting the checkout line. Where do you plan to wear this item?

5 Do you see yourself regularly using the item in question? Have you budgeted for this expenditure? Your answers will determine your purchase power. Step #9: Ask for help. If you re having a difficult time meeting your financial obligations, consult with a CPA. He or she may be able to help you establish a budget, consolidate your debt, determine your eligibility for certain loans, and devise a repayment plan that is realistic. Another alternative is to contact a nonprofit consumer credit counseling service. If your debt is too high for you to handle on your own, contact the Consumer Credit Counseling Service ( ), a nonprofit organization that educates and counsels people on the use of credit. Step #10: Start saving. Once you have paid off your debt, you can begin to establish a secure financial future by following one simple rule: Pay yourself first. CPAs recommend that you build a financial safety net by saving three to six months worth of living expenses. This way you don t have to resort to using your credit card for unanticipated expenses. Once you ve established an emergency fund, you can begin to save toward your financial goals. Payroll deduction plans that automatically direct money from your paycheck to a savings or money market account or even a retirement plan are a great way to get started. What you don t see, you don t spend. More information Visit the Texas Society of CPAs consumer Web site, for more tips on getting out of debt and staying out. It takes time and hard work to pay off credit card debt, but it s worth it in the end. Those moments of dreading trips to the mailbox and screening your calls will become distant memories, and you ll be sailing on the Sea of Financial Bliss instead of worrying about capsizing into that tidal wave of debt.