Credit Basics
Take Charge of Your Debt
June 2006
Last year, there were more than two million consumer bankruptcy filings in the United States, up more than 30 percent from 2004 and shattering previous records. The personal savings rate dropped below zero. For every dollar earned, Americans spent $1.22. The average debt on credit cards crept up to $9,000.
Statistics don’t tell everyone’s story. Many people pay their bills each month and sock away money in their 401(k) or their kids’ college funds. But the trend for the past two decades has been to borrow more, save less, and spend, spend, spend. This trend has implications especially for baby boomers who aren’t building nest eggs in their prime earning years, says Lewis J. Altfest, associate progessor of finance at Pace University’s Lubin School of Business in New York City, and author of Personal Finance Planning.
“People need to sober up. They’re spending every last dime and not savings,” he says. Unfortunately, it’s never been easier to sink into debt, thanks to easy credit, the huge availability of consumer goods, and advertising that promotes spending—even to the point of calling shopping patriotic, says Brett Williams, professor of anthropology at American University in Washington, D.C., and author of Debt for Sale: A Social History of the Credit Trap. But there is a way out.
GET BACK IN BLACK
•Determine your debt. If you aren’t sure exactly how much you owe, chances are it’s more than you think. So sit down, spread out all your account statements and take a hard look at your situation, suggests Michelle Singletary, who writes “The Color of Money,” a syndicated finance column for The Washington Post. “Tear open bills you’ve avoided because you can’t pay,” she says. “Face the problem.”
•Prioritize Bills. Always pay rent or mortgage, utilities, groceries, auto, and home equity loans first. Keeping a roof over your head comes first. “Credit card debt is four or five on the list,” says Howard S. Dvorkin, founder of Consolidated Credit Counseling Services, Inc. in Fort Lauderdale, Florida , and author of Credit Hell: How to Dig Out of Debt.
•Then Focus on High Interest Debt. Tackle credit cards next. Always make more than minimum payments, says Singletary. If you owe $5,000 at a rate of 13 percent and make a minimum $60 payment each month, it will take 17 years to clear the debt. Pay $180 per month, and you’re clear in less than 3 years.
If all your cards charge roughly the same interest pay off the one with the lowest balance first. “It’s nice to cross a debt off your first. You need that encouragement to stay disciplined,” says Singletary.
•Switch to Cash. If it’s not cold hard cash, don’t spend it. Research shows that people spend about 30 percent less when they use cash. “There’s a psychology at work. Reaching into your wallet and pulling out cash is just hard to do,” says Altfest.
If you have a safety deposit box, put the credit cards in it so they’re available for emergencies but not for impulse buys. Or put them in a container of water and put it in the freezer. By the time they thaw, you urge to shop may have cooled off.
•Keep a Spending Journal. So where is all this money coming from to pay down debt?
“I can look at anyone’s expenses, cut 15 percent and not change their lifestyle,” Dvorkin says. “If people take a cold, hard look at their expenditures, they’ll find places to save.” Recording in a notebook each and every penny—from the utility bill to the coffee and bagel during your morning commute
