Jeff Rothenbach: Fighting the Plastic Dragon

Jeff RothenbachAccording to the Federal Reserve, consumer debt in America is over $2 trillion. That’s a lot of Prada. With such active lives, gay men seem to be spending well above the average consumer, and credit cards are so easy to use. If your contribution to that total is around one thousand (give or take), pat yourself on the back. You probably have a pretty good handle on your personal finances. However, if your portion is in the ten thousand plus range, you may want to read on.

This is not the last word on getting out of credit card debt, but a good starting point. If you are in serious debt, I would encourage you to seek out more information, and maybe even the advice of a professional.

I am writing this article not because I have some degree in finance (although I did pass Finance 303 in college), but because I have my certificate from the School of Life. At one point, I found myself more than one years’ salary in debt. I’m doing better now (not just because I got a better job, thereby shifting the debt-to-income ratio) and would like to share some of what I have learned along the way. The following is practical advice I have gathered from various sources.

1. Look at your credit cards differently. At Weight Watchers, they teach people to look at food differently. That begins to scratch the surface of what I am saying. But here is the next part: Food, along with air and water, are basic needs to survive. Credit cards are not. You may want to repeat that out loud. Credit cards are great for emergencies, like unexpected car repairs. But they should not be the first thing we reach for. Learn to look at that Visa or MasterCard as a safety net, not a close personal friend that shares each day with you. One suggestion that I heard is to put your credit cards in the freezer, inside a block of ice. In order to use one, you will have to go through the process of defrosting it, which should give you time to decide if this purchase is really necessary (no fair using the microwave).

2. Plan your budget. Look at some of your large expenses, like auto insurance and plan throughout the year. If your company has direct deposit, set aside money from each paycheck into a savings account to cover the big annual or semi-annual expenses that you have. A little simple math can tell you how much to set aside from each check. If you don’t have direct deposit, make a commitment to set aside that amount, and pay it like you would pay any bill. If you are ready to take this even farther, put away a little extra each month so that when an unexpected bill arises, you will have some cash to cover it. Also think about expenses that aren’t bills, like holiday gifts. Saving a little all through the year will mean you can make it through winter without maxing out your credit cards.

3.Paying the minimum amount due will keep you in debt for years. I don’t think this needs an explanation, but if you don’t believe me, pull out your last credit card statement. Compare the finance charge to the minimum payment due, and you will see how much (or rather how little) of your payment is being applied to the principal balance. If you can truly only afford the minimum payment, make it hold steady. You were able to squeeze X dollars out of your budget this month, you should be able to do the same next month. When your credit card statement comes next month, the minimum payment will be a little lower, but pay the same amount that you paid last month. That little bit over the minimum will be applied to the principal and you will see your balance going down a little faster each month (provided that you are not charging any more, and I don’t have to tell you that, do I?). Watch out for credit card companies that actually have a minimum payment that is lower than the finance charge, which can lead to you owing more each month, even when you aren’t using the card. Be sure to pay more than the finance charges and fees so that the balances are actually going down month by month.

4. Make your payments wisely. This one is two-fold. First, pay as much as you can comfortably afford each month. It might feel great to send your entire paycheck off to the Visa people, but what will you live on until next payday? Will you just charge groceries, utility bills, gasoline, etc? Refer back to #1 and #2. Leave cash on hand to cover your daily living expenses. This will also help you get comfortable with that feeling of paying cash for things. Learn to love that feeling, because it will help you later on. Part two is pay your credit cards according to their interest rates. Make the minimum payment on the card (or cards) with the lowest interest rate, and pay as much as you can on the card with the highest rate. Once you have paid off the card with the highest rate, start applying your extra money to the card with the next highest rate. You might also want to cancel that first account to reduce any temptation to use the card again.

5. Don’t be afraid to make an extra payment. I know it sounds silly to say, but some people think of making a payment only once a month. Some credit card statements have multiple pages with a payment coupon on each page, so you can easily send that in with a second payment anytime. If you don’t get extra payment coupons with your statement, photocopy the payment coupon one month and save it for later use.

6. Try to avoid borrowing from Peter to pay Paul. Your goal should be to pay off the credit cards, not move the balances back and forth. Sometimes a special offer comes along that will reduce your interest rate for a balance transfer. Look at the offer carefully. Many of these offers have a time limit on the lower rate, and at the end of that time, you might be right back where you started. Sure you saved a few percent for a few months, but if you paid a service charge for moving that balance, you might not save anything at all. If the offer will lock in the lower rate until the balance is paid off, it is probably going to save you money. However, if the special rate has a time limit, get out the calculator and do some serious number crunching before you take advantage of it–or vice versa.

7. Think long and hard before you consolidate your debt. This is an extension of the last tip, but I’ll expand on the topic and make it a separate item. If you own your own home, it may seem like a practical idea to refinance the house, drawing out some of the equity you have built up and using that cash to pay off your credit cards. You are not only getting a better interest rate, but the interest you pay can now be deducted on your taxes. Here’s the downside (and I hope you are still reading here): now that your credit cards are cleared, you are free to charge them right back up again. Then you will be farther in debt than you were before because you are carrying a larger mortgage. Worse yet, if you get caught up a repeating cycle of maxing out, refinancing, and charging again, what do you do if the real estate market falls and you no longer have any equity in your home? If you are absolutely positive that you have your credit card spending under control (i.e. your ex stuck you with huge debts, and now that he is gone, the cards don’t get used at all), then go ahead and consolidate. Another option here would be to use the equity to pay off the cards and then cancel the cards. When your financial situation is a little stronger, you can apply for a new card. Otherwise, pay the cards off the long way, to make sure that they stay at zero balance.

8. Learn to negotiate. If you have a card with a high interest rate due to late payments or over-limit charges, work on bringing the rate down. Sometimes they will tell you on the statement what you need to do to get your old rate back (like six months of on-time payments and staying under your limit). If not, here it is: Don’t break the rules. Yes, they need us as customers, but they have the money and we don’t, so they set the rules. Be a good card member by staying under your credit limit and making your payment on time every month. Keep track of your last bump in the road, and call them when you have gotten a respectable distance from it. When I was in that spot, I made my payments on time (more than the minimum even) for one year. As soon as I knew that the twelfth payment posted, I called customer service and explained that my payment record has been good for a year and asked if they would bring my interest rate down. After waiting on hold for about two minutes, I was told that they would take five points off my rate. Not bad for a phone call that took less than ten minutes. I made the same call again another year later and got four more points taken off. If you are really good at making deals, try calling the credit card company right off to ask for a lower rate. If they think that a high rate might prevent them from getting paid, they may be willing to negotiate. Be ready for them to suspend your charging privileges until the balance is paid off. It may sound drastic, but that might be just the thing you need to get your debt under control.

9. Here’s a bonus tip for those that are addicted to shopping: Just because you got a gift card for Christmas, does not mean that you have to spend it at the after-Christmas sales. Gift cards usually have no expiration date, so if there wasn’t a specific item you had in mind, set them aside. When you get that itch to spend, grab a gift card and have a blast. I find that they swipe just like Visa and MasterCard and satisfy my urge, but without a statement in the mail around the 20th of the month.

10. Seek help. There are counseling services available for people in credit card debt. Part of the process involves the counselor explaining to your creditors that you are in debt counseling and negotiating pay-off plans for you. While they will help advise you on how to pay off your debt, your credit score won’t be quite as high as it would be if you did it yourself. Something to consider if you goal is to buy a house in the next 5-7 years. However, if doing it on your own isn’t working, then this would definitely be better.

11. Reward yourself. Set yourself smaller goals that lead up to the final goal of paying off your credit cards. For example, you might set goals of reducing your total debt by 20%, then another 20%, etc; or you are going to pay off card a, then card b, and so on. When you reach one of these goals, celebrate a little. But don’t make the prize another charge on the card. Remember that savings account that you created in #2? Withdraw a little bit and do something for yourself–buy a new DVD or a great pair of shoes. Small rewards along the way will help you stay on track for the big goal. This is also a time to reinforce the idea that it is good to pay cash for things.
I admit that it won’t be easy and it won’t happen overnight. But hang in there and focus on the positive steps you take and the successes that you have along the way. In time you will not only have your debts paid off, but you will also have the feeling of accomplishment that comes with conquering your own demon.

About the Author

Jeff Rothenbach is that rare breed of Angeleno that was actually born here. He enjoys reading mysteries, cooking and theatre. He is very happily living with a certain German-born astro-physicist that runs a website for gay men.

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