To Charge or Not To Charge... Is That REALLY a Question?

I'm going to start out with a little narrative. I'm sure we have all faced this dilemma at some point. Your car tires are almost bald and it's time for a new set. Your computer craps out and (Oh my, how will I do my online bill payments?) it needs replaced quickly. These things can add up. And it's not just big purchases like these that will put your credit card balance somewhere in the 4-digits. Let's say you or your spouse lose a job... that credit card can make ends meet.

But it can also make you meet your end. Nobody stops to ask him or herself that basic question. "Can I afford this?"

I'm going to use my own experience of getting my debt whittled down to a manageable clump as an example throughout. Once I hit the magical 5-digit mark (yes, I had over $10,000 in credit card debt), I realized it was time to get serious and clean that shit out. I decided it was time to put together a plan, stick with it, and live like a broke man for awhile. Was it that bad? No, not really. It has been quite easy, and the rewards, which are about $1,000 away from being completely in my grasp, are definitely worth it. So let's go through a step-by-step... maybe this advice will help someone who is in a similar predicament.

Step 1: Stop Spending Money You Don't Have

This sounds like a no-brainer, right? You would think so, but think again. We live in a day and age where everyone wants everything right now. What? You don't get paid until the 15th and it's the 9th? Oh, I'll just charge it to my card and pay if off when the bill comes. YEAH! Then something else happens, draining you of money, and that balance becomes the "Oh, I'll Pay It Off By Christmas" debt. And that, coupled with the other purchases you have made since then, become a huge problem.

The best way to stop using credit cards is to lock them up. Put them away, like in a file cabinet in your home, or in a safe deposit box at the bank (if you are weak-willed). If you don't have them in your wallet or purse, you will not be inclined to use them. That really is the best advice I can provide. Once I did this and decided to just live off actual money, buying only what is genuinely needed (and saving up for the "wants"), I got to see my ballooning debt halt in its tracks. Once that was done (and trust me, folks, it was easier to do than you might be thinking right now), it was time to move to step 2.

Step 2: Organize Your Debts, But Beware

I will be up-front about this part. If you hear an offer on TV or in print about these "debt consolidation services," run like hell. Sure, they offer counseling, but usually the fee is not worth it. They are businesses out to make a profit, and they're going to use you to do so. Do you need to pay someone to help you manage your crisis? HELL NO! You are grown. You have will power.

The first thing you need to do is make a list of your credit cards with balances. Include in the list the total debt, the interest rate, and how much the minimum monthly payment is. This will help you get a good understanding of exactly how much you owe and how much you need to pay. Beware though. You have heard this before, I'm sure, but making the minimum payments only is bad because meanwhile, the issuing bank will be charging you interest. Yes, that nasty I-word. Think about it. If your minimum payment is $50 a month, and the interest they are charging is $35.00 on your entire debt, you're only making a $15 payment toward the pile each month. It would take you 30 years to get out of debt that way.

We're going to use a ficitious person, and we will call her Sue. Let's say that Sue has the following debts:

Oh no! Sue has $8,000 in debt. What can she do?

The first thing you want to figure is how much you must pay each month. In this case, Sue would need $120 a month to make the minimum payments, which you must do.

I have heard in various outlets that you should aim for the higher interest debts first. I have also heard to aim for the highest balances. Personally, it worked better for me when I paid the higher balances in a higher share first. I kept the lower balances at the minimum payments and paid extra on the high balances.

The next thing you want to figure is how much a month you can afford to spend on paying these off (not how much you want to spend). Let's say Sue has analyzed her expenditures (save money for food, by the way!) and she can afford to pay $300 a month on the cards. She has decided to aim for the high balances first. She spends $30 a month on the Visa, $25 a month on the MC, and $245 on the Discover. The Discover would keep getting the remaining balance until it is paid off, at which point that money would go to the next highest balance. This is called "snowballing" and is quite effective.

It also helps to use additional sources of income, like saving money left over at the end of pay periods or tax returns, to make additional payments. It's nice to use that tax return to buy a new TV, but isn't that how we can get into this mess in the first place?

Step 3: Remain Keen

Another question that some may ask themselves is this. What happens to all the interest you are accumulating in the meantime? Yes, that interest will keep accumulating (although at a lower ration now that Sue is making higher payments and is not making new charges on the cards). However, from time to time, you may get an offer on an existing card for a zero-interest balance transfer. These, in my opinion, are golden. Most companies will send these offers out several times per year, or you may opt to find and get approval on a new credit card. Often times, to lure new customers, companies will offer a special 0% interest offer (lengths of terms may vary, but are typically a year).

HOWEVER... BEWARE! If you do not pay the balances off within the period specified, they will charge you the full year's interest that you accrued while you weren't being charged the interest. This would suck, especially on high balances when suddenly you're stuck with $300 in interest charges.

How did Sue get around this? For example, we will say Sue's balances were paid off in 2.5 years (which would be about typical for $8,000 in debt paid at $300 a month). Sue transferred her two small balances to the Discover card for 0% interest for 1 year. Nearing the end of the year, her Visa card (now with a zero-balance) offered her another year at 0% interest, so she transfers the entire balance to that card and continues paying the $300 a month.

One thing to note is that to do this usually incurs a fee of $10 or 5% of the amount transferred, whichever is greater. However, weighing a possible $50 fee against $200 a year in interest is a no-brainer, as long as you aren't bouncing balances back and forth every six months and racking up these fees.

Finally, always read the fine print. Don't get yourself stuck in a mess by, for instance, transferring more to your credit card than the credit line holds. You can't stuff 10 pounds of manure into a 5 pound bag, nor can you transfer $8,000 to a card that has a limit of $3,000.

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There you have it. My advice for getting out of credit card debt. Doing this can free that $300 a month up for other things, like a saving for a vacation, paying extra on your car or house, or buying yourself something nice.

If you have any of your own tips or anything you would like to share, post a comment below. Other points of view are always great to have!

Happy snowballing!

.Last Updated: Thursday, 06/07/2012 7:33 PM