Credit Basics
By Betsy Wiesendanger
Like many responsible Americans, Nicole Riggs never meant to fall into debt. But when her spending habits led to skyrocketing bills, she took steps to remedy the situation.
Nicole’s financial problems developed
as life’s urgent demands kept getting in the way. A single mother, she held down a full-time job in a Minnesota relocation office. When unexpected expenses cropped up, she relied on credit cards to cover the deficit. Slowly, her debts climbed. Then Nicole married in 2005, and her new husband, Brent Riggs, brought his own debts into the union. After paying for much of the wedding with plastic, Nicole was soon unable to cover basic bills.
“I always thought I was good with finances,” she says. “But when I got married, I was having a hard time balancing
household bills and food costs. It came to a point where I was at my wit’s end.”
Nicole’s story is all too familiar. Many families find themselves thousands
of dollars in debt, whether from mismanagement of daily living expenses
or from unexpected financial emergencies. One study by the Pew Research Center shows that at least one-third of U.S. adults say they’ve had an unforeseen expense in the past year, such as a medical crisis or home repair, that seriously set them back financially. Fortunately, no matter what the cause, debt is almost always manageable. These tips can help put your finances back in the black.
End Wallet Worries
The first step to regaining control of your debt is to take a financial snapshot. Get a clear picture of exactly how much you owe. List each source of debt, the outstanding balance on each, and how much interest you’re paying. “The majority of people who wind up in debt juggle seven or more credit cards and pay them at different times of the month,” says Gary Herman, president of Consolidated Credit Counseling, a nonprofit agency in Fort Lauderdale. “A lot of times they don’t know what it all adds up to.” Nicole Riggs certainly didn’t—she was shocked to discover that she and her husband had amassed $15,000 in credit-card charges alone.
Because it’s so difficult to keep up with a big stack of credit card bills, consider cutting back on the number of cards you own. Credit cards that are only good at one retailers might not make the most sense for your spending habits, and you can easily lose track of the terms that come with those cards. Also remember
that all debt, including mortgage payments, car payments, credit cards and student loans, should equal no more than 36% of your gross monthly income, according to Ilyce Glink, author of 50 Simple Steps You Can Take to Improve Your Personal Finances.
If one big bill is giving you middle-of-the-night jitters, try contacting the lender to renegotiate the terms. For example,
if you have an adjustable-rate mortgage that has just adjusted upward, consider refinancing. Other lenders, such as medical providers, may also be flexible about letting you pay a bill in installments rather than demanding the entire amount immediately.
Stop the Leaks
Once you’ve done some triage, figure out a spending plan. List your monthly expenses: food, mortgage and car payments, as well as incidentals like DVD rentals, clothing and gasoline. Unsure how much you spend each month? Check bank and credit-card statements. For cash expenditures, try putting your cash into an envelope every time you go to an ATM. Whenever you take money out, note the expense on the envelope. You might surprise yourself by how much you spend each week eating out or buying morning coffee, for example. Limit expenditures in those categories to help.
Also budget for recurring yearly expenses. A child’s school fees, car and home insurance and vacations are all big bills that can catch you off guard, says Diane Gray, director of counseling
and education for credit counseling agency Novadebt. List all of these bills, add them together, and divide by 12 to determine
how much you should set aside each month.
If you add up your monthly outlay and find you have no extra money to pay down debt, consider contacting a nonprofit credit-counseling agency. These agencies can run the numbers and help you determine where to cut back. They may also offer a “debt management plan” in which you deposit money with them each month and they pay your bills on your behalf. But watch out: not all agencies, even nonprofit ones, are legit. For information on choosing a credit counselor, the Federal Trade Commission offers a fact sheet at www.ftc.gov/bcp/conline/pubs/credit/fiscal.htm.
Move Foward
Once you’ve got a plan in place, start paying down your balances.
Pay special attention to high-interest debt. “Many people
in financial trouble may be paying punitive rates as high as 25% or 30% on their credit cards,” Gray says. “Doubling up on those payments can really help you save in the long run.” Examine the terms of your credit cards and pay off those that increase interest rates or charge high fees if payments are late.
To stay on track, check your urge to splurge. For example, watch how much time you spend wandering the aisles. Statistics
show that the longer you’re in a store, the emptier your wallet will be when you leave. Shoppers who spend 30 to 60 minutes in a mall spend an average of $72.70, according to the International Council of Shopping Centers. Linger three hours or more and that figure climbs to over $200. Also try to contribute to an emergency fund so you’re not always reaching for credit cards when the unexpected occurs. Traditional wisdom
says you should have three to six months’ salary saved, but that’s out of reach for some people deeply in debt, Gray says. At the very least, start setting aside a small amount each month.
The reward for restraint? A clean financial slate. Just ask Nicole and Brent Riggs, who cut back on the number of credit cards they own and eliminated almost all splurges from their budget. The family doesn’t eat out much and limits trips to the movies to once a year. Nicole and Brent also work part-time jobs to bring in additional income.
Today, the Riggs’ debt is down to $6,800 from $15,000. Even more heartening, Nicole has completely paid off three of her seven credit cards. Says Nicole: “I’m determined. I don’t ever want to be in that position again.”
