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The dangers of credit card debt

We could go on and on in the debate on whether credit card use is good or evil or easy or hard or wise or foolish. But – at the end of the day, there are a lot of people in credit card debt who want out… and they want out NOW. This post is written for those people!

Read about how I closed and shredded my credit cards and along with these additional reasons to pay off credit card debt.

If you are in over your head with credit card debt, before jumping into the arms of a credit card debt consolidation relief company, you should consider taking care of the problem yourself. If you have the proper motivation and self-discipline you can do it yourself. It may save you money, help you retain a better credit score, and make you feel better about yourself.

Look at this article as your “How To Handbook” for credit card debt reduction. Know that it is not for the weak or faint-of-heart, so if you are looking for the easy way out – look elsewhere. But… if you have passionate determination to gain control over your debt, on your terms burning inside of you; if you have had enough of the status quo and are ready to turn the tables on the credit card banks… then you are in the right place.

How to pay off credit card debt

First thing’s first. Make sure you listen to what I’m about to tell you… because I know what I’m talking about – I was in your shoes not too far back. I had credit card debt and was living paycheck to paycheck. Now I’m not.

Here’s how I did it, and how you can do it too:

Commitment and Accountability. Since you are reading this post there is little doubt that credit card debt reduction is something you need. Do not feel bad, do not feel overwhelmed, just take a deep breath, get mad at your debt, and commit to doing something about it… for REAL this time! Once you commit, find someone you trust to help keep you accountable. This person should be someone you love and someone who loves you. Someone who has your back… yet isn’t afraid to call your bluff. It’s powerful to partner up… chances are you will need them somewhere in your debt freedom journey.
Know There is Hope. There is hope for you, I promise. NEVER forget this… EVER! Depending on how deep you’re in it will take time and sacrifice – so don’t fool yourself into thinking this will be easy – but as long as you develop a plan you will be just fine. Setting your plan in place gives you peace and hope; because once it’s there… it’s just a matter of time.
Take Inventory. How much do you owe? How many cards do you have? What about your significant other – are your bills together, separate, scattered about? Collect all the following information about each card and write it down: Bank name, bank phone number, account number, credit limit, interest rate, amount owed, due date. If you ever get discouraged while doing this… refer to step one – remember your commitment.
Get on the Same Page. You need credit card help, not more harm. If you have a significant other, it is important for you to view and approach credit card debt together. Being in credit card debt is not a game and if you do not enlist the help of those closest to you, it will be MUCH harder to get out of credit card debt. Having loved ones on board is one of your biggest allies when seeking credit card relief.
Take Control – Negotiate Your Own Debt Solution. Are creditors harassing you? Before you sign up with one of those credit card debt management services know that you can do exactly what they do relatively easily. Cut out the middle man, save your money, and call your credit card companies directly to negotiate your own solution! When you do this, make sure you request all correspondence in writing and never let them shaft you on your written copy… because they will try. Although I did not have to do this, I have been very involved in this process for my sister’s credit card debt reduction program. She is digging her way out of a lot of debt, so I know you can too. Even if it seems overwhelming, it is just a matter of getting a hold on the situation. Once you do that – getting rid of credit card debt is MUCH easier.
Save at least $1,000 in an Emergency Fund. This is VERY important because it will buffer you against any emergencies that you may come up against while in credit card debt reduction mode. Consider the following scenario: You have no money saved, and are putting all available funds toward debt repayment when all of a sudden the transmission on your vehicle fails. What do you do? Having at least a small emergency fund will prevent you from having to put this necessary expense on another credit card. Remember, the goal is credit card debt reduction – and this buffer is necessary! To come up with the $1,000 have a garage sale, deliver pizzas at night for a month, sell some of your stuff, etc… just hurry up and come up with it so you can start repaying your credit card debt ASAP.
Only Pay What You Can Afford. Once you negotiate debt settlements with your credit cards, just pay the monthly settlement amount each month – unless you can afford more. If you did not settle, just pay what you can afford. NEVER let the credit card banks pressure you into going without groceries or paying for housing in order to pay them more. Just figure out what you can afford to pay them, and pay them that much. Period. Be confident, because all of this is well within your consumer rights.
Consider Peer to Peer Lending. If you still have a decent credit score (of at least 660), do what I did, consolidate credit card debt with Lending peer to peer loan. This only furthers and supports your move to take control of your own credit card debt reduction process. Not only does this allow you to bypass questionable credit card debt consolidation scams, it will also combine all your monthly payments into one single debt payment and most likely lower the debt interest rate you are paying. Make sure you only consolidate debt that is at a higher rate than you can get through Lending Club. Another benefit is that you can consolidate all types of debt with Lending Club, not just credit card debt. My Lending Club loan was a consolidation of 3 credit cards and 1 auto loan. Read more about my debt consolidation story by checking out my Lending Club Review.
Reduce Expenses – Increase Income. Do whatever you have to do to start living on less while earning more. Living on less will increase your ability to speed up your debt reduction. Lowering your expenses is crucial because in doing so you are essentially giving yourself a raise. Save money on groceries, save money on TV bills, save money on trash bills. Use ideas like these to increase cash flow, increase credit card debt reduction payments, and increase savings. You will also benefit greatly from increasing your income. Do what you have to do. Keep that pizza delivery job you attained to build up your emergency fund, start a blog, become a dog sitter, house sitter, or baby sitter. If they pay you for it, put in overtime at work. Start a business out of your home doing something you love. As you can see there are many ways to increase income… I have just listed a few here. Be creative, get out there, and work your way out of debt!
Save Money While You Repay Debt. Others may argue with me here, but I believe you work too hard to have 100% of your money leave you every month. Make sure that you always pay yourself something; even if the amount is small… something is better than nothing. Even if you can only save 1%, then save that 1%. Consider following my 75/25 method of debt reduction and emergency savings. I am a believer in the old adage, “pay yourself first”, even if it is only $5/week!
Go on Autopilot. Take a deep breath again… now things are starting to feel better right? Now that you have everything in order, just let all your bills go on autopilot. Use this time to start a budget and take care of other personal finances loose ends. Continue reducing you expenses, start reading some good personal finance books, and really start building your knowledge of personal finance matters so you do not wind up in this position again. Remember that a journey of a thousand miles begins with a single step, and the tortoise always wins the race. This isn’t about huge and fast credit card debt reduction; this is about faithful and consistent credit card debt reduction!
Commitment and Accountability. Yes, step 12 is the same as step 1. Why? Because patience, commitment, and accountability seem to be lost art forms in our modern society, yet those who are patient, consistent, and committed are the ones who always end up winning in personal finance! Do you want to be successful in credit card debt reduction? Do you want to win? Then be patient, follow this guide, stay committed, and sit back and watch as your credit card debts shrink and your savings grow. You are not alone… not only do you have your accountability partner, you also have me! I’m on the same mission as you! You can follow my monthly debt and savings updates for encouragement and motivation to continue on your own debt free adventure.

Free credit card debt ebook

Everything happens for a reason. Although I wish I never would have had to go through my credit card debt reduction experience… I do know that it happened to me so that I could help you.

Make sure you use this handbook to help you get out of credit card debt. Heck, use it as a guide to get out of debt period!

Download this free ebook on how to pay off credit card debt.

Download it, save it, print it, and share it for free. The more people we can help with this information the better!

In debt but receiving a tax refund

DFA reader Anna wrote:

I am a divorced single mother of two young children. Due to the irresponsible financial behavior of my ex-husband (an addict), and my ignorance–my credit and financial picture is ruined. I have several stafford loans that are in default because I couldn’t pay them and was ashamed to call to work out arrangements (stupid, I know now). I can’t finish my degree (I only have one semester left!) until they are paid because I can’t afford to pay for it on my own.

I have two bank accounts that have been charged off that my ex-husband overdrew (in my name only) without my knowledge until it was too late (I know I should’ve paid closer attention, but I trusted my spouse at the time). I have a credit card with 24% interest that was charged off a few years ago but reinstated and I’m on an automatic payment plan to pay it off. The card is in good standing but after it’s paid off the account will be closed. I got laid off from my job and am struggling to make ends meet. My wonderful parents are helping out as I am frantically looking for employment (I feel horrible about this as they are retired and don’t deserve helping me). I live in a house my parents own so I do not have rent or mortgage. I will receive a $9600 refund and would like to use it to regain some financial footing. Before I was married, I had a $30,000 nest egg, retirement, and good credit. I feel like I’m in a hole too deep to climb out of and am very embarrassed. I am 35 and have to support two kids on my own. I want to be able to send them to college, own a home, and retire before I’m 90. I have paid off everything on my credit report that was negative except my school loans and bank accts. Once that happens I will effectively have ”no” credit.

Income

0 (hopefully will change soon)
No child support (not an option)

Expenses per month

Mortgage/Rent: 0 (for another year then I have to find a place of my own)
Credit card with 24% int: $150/mo repay plan balance: 4200.00
Utilities: $160/mo
Gas: $ 200/mo (I drive 30 miles ea way to take kids to school, this changes next fall)
Medical/dental Insurance: none
Groceries: $250.00
Cell phone: $65.00 (no land line)
No cable (we play games/read, etc)
Internet: $60.00

Debt

24% int credit card: bal $4200
Stafford loans: 7,500
Bank Accts charged off: $2000

Note: I no longer have a bank account because I’m in cheksystems. I refuse to get a ”second chance” account with high fees and no interest. I want to pay the charged off accounts, get out of cheksystems, & have a real account again.

I know one of the first steps is finding employment. I’m working tirelessly on that. I can’t change anything without income. How do I even begin to rectify this mess? How can I put the refund good use? I know I need to create a nest egg, but what is a good split of the money? I was thinking about putting some in a high interest CD for a year or two. Any help would be much appreciated! I’m so close to it and emotional about it that I’m frozen in fear about what to do next. Thank-you!!!!

How to spend the tax return – and other advice

Hi Anna. First let me say that I feel for you, carrying a debt burden is hard enough, adding unemployment and children into the mix must make it nearly unbearable. Here is my advice on how to spend your $9,600 tax return along with a few other pointers.

1. File for unemployment insurance and/or state assistance

This may be a hit to your pride, but the systems exist to provide temporary assistance to people in bad situations – you are in a bad situation. Just be sure you do not treat any relief as entitlement… continue seeking employment, eventually you will find it and can cancel the aid.

Your expenses add up to $735/month and state aid will give you enough to cover this, and then some, until you find employment.

2. Pay off the charged off bank accounts

Use $2,000 of your $9,600 tax return to bring current the charged off bank accounts. This may not be how you want to spend the money, but because of past circumstances and decisions, it is a necessary step. $9,600 – $2,000 = $7,600 left.

3. Settle the credit card account for less than what you owe

Call the credit card company (or collection agency) that now owns the $4,200 debt and settle with them. Tell them you want to settle for 40% of the debt and that you can pay the balance of the settlement off ASAP. They many not do 40% but they will certainly settle for less than what you owe. Once you reach a settlement amount, pay it off. Let’s just assume they will settle for a cash payment of half of the balance at $2,100. $7,600 – $2,100 = $5,500 left.

This will also reduce your monthly expenses by $150, which you can now put toward a payment plan for your Stafford loans (see next step.)

4. Bring your Stafford loans current and get on a payment plan

Call your Stafford lender to bring your account current with a $1,500 payment for a new loan balance of $6,000 and tell them you are ready to be set up on a regular payment plan of around $150 using the $150 you freed up by settling your credit card debt. $5,500 – $1,500 = $4,000.

5. Use the remaining $4,000 to establish an emergency fund

Open an Capital One 360 savings account and deposit the $4,000 to establish your emergency fund (use this link for an Capital One 360 savings with a $25 bonus.) Do not spend this money unless it is a true emergency… this account now replaces your credit card as the account you turn to for emergencies.

Any more advice for Anna?

If you have more advice for Anna that I missed, do her a favor and leave it in the comments.

How to Pay Off Credit Card Debt