How to get out of credit card debt, Redux

[jamethiel]

So. This comm has been a little quiet lately. A large part of this is because I lost the plot for a little while. I got out of nearly three grand's worth of credit card debt. Then I promptly got back into debt again. So this is going to be a post about what I have learned about getting out of debt and things I would do again, wouldn't do again and what didn't work for me.

The first part to admitting that you're in credit card debt is... admitting that you're in credit card debt. Do you pay interest on your credit cards? Could you pay the balance off in a month, while meeting your other obligations? If the answer to that is yes, and no respectively, then you're in debt. It might be tiny, being $50 that you have no room in your budget to pay for a couple of months. It might be so huge that you can't look at the number without hyperventilating.

You need to have knowledge about your situation to be able to control it. Yes, it's really scary. It's grownup. It's something that I'd never done before I turned 30, by which time I was already $3000 in debt, so most of you will be way ahead of me. It can be a totally new situation that caught you unawares after a lifetime of being financially responsible, or just skills you were never taught (hi, parents who thought that talking about money was gauche! AWESOME JOB preparing me for the real world there :( *shrug* I've taught myself now). You need to know exactly what you owe.

The next step is: Stop digging. Stop adding to your debt. Interest does enough of this (I'll get to that in a minute). This was where I fell down. A lot of people can use their credit cards and pay it off in full each month. And when I got out of debt? I started by doing that.

But then I had an emergency (moving out in a hurry). And I needed money and didn't have it, so I used my credit card as a temporary loan. And I paid off most of it, but then there were unexpected expenses and things that I had to have RIGHT NOW, and no harm if they go on the credit card, right? I'll pay them back next month.

The first time I got out of debt, I put my card in the freezer in a block of water so I couldn't use it. I'm going to do this again. (edit: Done it!) You could cut up your card, put it into a sealed envelope, or just don't carry it with you. (I'll get to what to do when you're out of debt last)

Secondly: Balance transfers are your friends. With Caveats.

There are a number of products on the market with $0 annual fee, 0% interest on balance transfers. This is usually for a limited period of time (six months). This is useful, but only if you don't use the opportunity to run up more debt. The first time I did this, I performed the balance transfer and immediately rang up to cancel the card I'd done a balance transfer from. Cut it up. Cancel it.

The danger is if you've used credit in a bad manner before, how do you stop yourself from using it in a bad manner this time? You know yourselves. If you know you have the discipline to transfer your money and not immediately put stuff on your newly freed up credit? Go for a balance transfer. If you don't, don't do it. Absolutely do not use your balance transfer as a source of more money. Pay it off, but NEVER ADD TO THE BALANCE. That way lies further debt, a bigger financial hole, wrecked credit ratings and possible bankruptcy. DO NOT DO IT.

I'm going to tempt fate a little. I'm going to keep my existing card, because I like the product. No fees, etc. But it stays in the freezer and I don't use it. The balance transfer, if I get it, again goes in the freezer. I'm never intending to use this card--once I've paid off the debt, I'll ring and cancel it if I can do so without tanking my credit rating.

Pay yourself first.

Budgets are your friend. Now, some people can keep everything in their heads and never miss anything. I am not one of them. I keep a detailed daily budget of ALL my accounts, my upcoming expenses, when I expect them to come out. Opening my budget spreadsheet every day keeps where I am financially in my head, gets me into the habit and keeps me motivated.

A lot of people set themselves the bare minimum for living expenses and bills and then pay everything else on the credit card. While that will work, what happens if you get an unexpected expense?

The reason the approach of "PAY EVERYTHING NOT ESSENTIAL FOR LIFE ONTO THE CARD" worked for me the first time round was that I had fallbacks. I was living in a situation where if something came up, I could go up to my friends and say "Rent will be 3 days late" or "The washing machine has blown up. I can take $xxx from this month's pay, if you will spot me the rest and I will pay you back over time," without it affecting my credit rating. So I got out of debt, but when I was no longer in a situation where I could do that, and unexpected expenses came up, back into debt I went.

This is my main take-home message from this time around. I have to have savings, otherwise I'm right back where I've started.

I'm part of the way there. This month, I have $500 in once a year/unexpected expenses. It'll wipe out the savings in my bills account (I have more than one savings account. More on that a little bit later), but I'll still have enough to cover it with a little to spare, and a couple of hundred in other accounts. That's a win according to me.

So, to pay yourself first: have savings. Have an emergency fund. Do not touch it (for my money, ING and other similar internet high interest bearing accounts are wonderful. You can get at your money after 1 business day if you absolutely must, but the fact that you can't go and withdraw money on a whim really works for me. You have to wait for it.)

Pay as much as you can on the credit card.

The banks are out to make money off you. This took me ages to work out (*g* I know, I'm slow). I once sat down with a calculator and worked out that with interest and paying the minimum repayment, it would take me around 50 years to pay off my credit card debt. In that time, they would have made around $60,000 profit off me. For a $3,000 debt.

It is not in the banks interest (heh) to have you pay off your credit card balance. They don't make any money of you if you do that. You must make the minimum repayment. But beyond that, you have to pay as much as possible onto your card.

There are lots of methods that work. A lot of people like the "Debt Snowball" and it does work. I, personally, have worked out that at the moment, I need to pay $75+ a month for my card to break even (I do have one monthly expense that bills to my credit card, + interest). I have that minimum set up as an automatic debit. Note that this is over TWICE the minimum repayment the bank has asked of me. I do not ever vary this amount. It is part of my budget.

Beyond that, I have a benchmark. Months like this, where I've got big expenses coming out, I pay $100 ($50 from each paycheck). Other months, when it's not so hectic? $100 minimum per paycheck and I see what I can afford beyond that.

Essentially: work it into your budget. Every little helps.

Allow yourself some spending money
I've observed something about myself. I set a draconian budget, and feel really proud about myself. And I stick to it. For a month or two.

But then I have a really stressful day/week, or I get tired and I think "I JUST WANT TO HAVE FUN." And I end up going out and spending money that I don't have, and adding to my problem. The way around this for me is allowing myself some money to spend. I don't HAVE to spend it but it's there if I need it. It's a minimal amount (this paycheck? It's $12) but it's there.

Thoughts on whether you should have credit or not

Now, opinions are divided about the use of credit. Some people can use it and not abuse it, and not end up with a single cent of interest to pay. If you can do that, congratulations!

Credit is fine, so long as you treat it as a tool and you don't abuse it. It's handy, but it's also really easy to get into very bad trouble with if you're not careful.

It seems that I can't use credit well. I was so sure that after I'd got out of debt the first time that I wouldn't get back in. Part of it was not having the savings. Part of it was having my credit card accessible and not planning purchases.

I'm not going to assume that I'll always be this way. After all, three years ago I didn't know how to budget. Four years ago I had a maxed out credit card. I've got systems in place now to stop the problems that I identified as to why I got into debt in the first place. I've got my list (talked about below). I've put my credit card away. I'm working on savings. However. There are some people who just don't have the right headspace to use credit. I might be one of them.

This is where I'm publicly saying: once I get out of debt, if within the first year of having a $0 balance card, I ever pay interest, that's it. I'm cutting it up and cancelling it forever. If I can manage it, we'll see where we go from there


Here are some organisational things that I do to attempt to help me control my spending and keep on track financially

I've worked out that I spend money as retail therapy. However, that can get expensive really quickly. Here are some stress relief things that cost me minimal money. Instead of going out to an expensive cafe and spending $20, I will go to Koko Black (amazing chocolate store), buy two of their chocolates for around $6, take it home and make myself a proper afternoon tea with nibblies and a teapot. I use a giftcard to go see a film. I work out what free attractions are in my city that I haven't been to and spend an afternoon. Or I use the public transport card that I buy every month anyway and go somewhere I haven't been before.

With the money that I allow myself for spending, I don't spend it on payday weekend. I wait until the next week. This gives me a less stretched-thin feeling, and helps me get through to next payday without spending money I haven't budgeted for.

Another thing I do is: I write everything down in lists. I have a wants and needs list (That is a link to a publically consumable version of it). I have a couple of simple rules. I buy one need per pay packet. I buy one want a month, or sometimes just put money aside if it's a big want. I don't buy any want that's been on the list for fewer than two months (which is generally my "see if I still want this" cooling off period.) I price comparison shop. Usually, a Harry dresden book would cost me $20. If I search for it, I can find the next book I need for $6.

Now, onto organisation of money!

I find it really hard to concentrate on more than one thing at once, financially. You know, I can save OR pay off my credit card, but I can't strive towards both. It's just not how I work--I get frustrated because I'm not making as much progress as I can towards one or the other and wind up in a big mess. So, I end up having one thing I'm actively working for (at the moment, saving) and other things I've set the bare minimum on, they're automatic and I don't have to think about them.

Have different accounts for different purposes and automatic transfers are your friend.

What I do is I have $100 go into my bills savings account from every paycheck. It's an automatic debit, I don't have to think about it. $125 goes into my savings (which I've titled Computer, because it helps to have a goal). The amount for my rent goes into a seperate account. I never, EVER touch the rent account, even though I transfer slightly more than I need in and it earns interest. The eventual goal is to have 3 months rent extra in there, but it's not on my radar. It just does its thing and I don't have to think about it.

I look at how much I've got coming in. I leave the amount for the automatic transfers in. I leave the amount for food in, to be taken out in cash. I've largely got my food budget sorted out now--I know how much things cost, and taking it out in cash stops me from overspending. I go shopping once a week, directly after I take the cash out. What's left for incidentals during the week (there's always something) goes in an envelope that I don't carry in my day-to-day wallet. If I need something extra, it comes from there.

Before I had a bit of a buffer, I'd leave the amount for bills I had to pay in the next 6 days in my account (which is how long it takes the money to clear in my online savings account). Now I have a buffer, I transfer it all and schedule transfers back in the amount of the bills the day before the bills are due. That way it earns maximum interest and I don't spend the money for bills before they're due.

For the next three months, I focus on building up my savings. Once I've got a buffer of $500 which my bills account does not dip below, then I pay off my credit card. (I'm not organising a balance transfer before this because I'm going overseas, I don't want to have extra credit on my card and the 0 interest period is limited. If I can't pay it off in 6 months, I'm better off leaving it on my current card--the interest is lower than what the interest rebounds to on the balance transfer card after the 6 months is up).

Once the credit card is done, I split my energies towards building up 3 months income in savings, and building a house deposit. Once I've got 3 months in savings, I want to start building a term deposit ladder. Beyond that, who knows!

So, how are you all doing?

Comments

[jamethiel]

You're welcome!

*nods* Credit is a useful tool, but if you abuse it then it does more harm than good. If you absolutely can't have a credit card without being in a lot of debt, then better not to have one. If your card is charging you a yearly fee of $110, then there's no point keeping it, even with a $0 balance--unless it offers you something else that you value more than that $110 (but see if you can talk to your card provider to switch the product to a better one rather than cancelling). If you do cancel, and you're responsible, then cancelling one credit card will soon be wiped out by the force of the rest of your awesome.

And yes, agreed about not buying stuff you don't already have the money for. But, lessons learned and all that.

[indywind]

Yeah, having (good) credit is important. But, using a credit card is not the only way to develop credit and improve your credit score.

creditreport.com summarizes:
Things that affect your credit score positively:

Paying your bills on time and in full.
Using 25 percent or less of your available credit.
Steady employment.

Things that affect your credit score negatively:

Late or missed payments
Using more than 80 percent of your total amount of available credit
Bankruptcy
Liens or foreclosures
Periods of unemployment
Too many requests for new lines of credit

[vass]

So, how are you all doing?

Good! My goal for this year is to have $2000 in savings, and it looks like I'll exceed that.

I don't have credit card debt, but I also don't have a credit history, like, at all. So I've decided that pretty soon I'll apply for a credit card and use it for some regular monthly expenses, and automate the repayments so I never have to pay interest. My plan is never to touch it unless I have the money already in my bank account to pay off the balance right away.

I'm also doing some cost-cutting measures like switching from a bank account with monthly fees to one without fees, and switching internet providers to one that's $20 cheaper for the same data plan.

Finally, I'm working on getting some skills and experience so I can get a job one day. That one's not going so well - I have a lot of shame about my lifelong unemployment.

[jamethiel]

:D Well done you on the savings thing! And just... be careful, with the credit card.

oh, well done on the cost-cutting thing! I meant to mention it but this post was a monster that took me three days two write as it was. I should do another one next week, along with "making extra money".

Serious props for skilling. Starting out is really hard, and you're really, really brave--I held a series of disposable nothing jobs until I was 30, cause I was too scared to admit that school was over and I needed to find a career, and finding actual "career" type work was scary. But worthwhile! I love what I do now. Don't get discouraged, and let me know if I can do anything to help!

[red_trillium]

Thank you for your thoughts, and reminders. I'm doing ok. I'm slowly paying down one of my cards but did break down recently and used the other one. The one I'm paying down is for a reason: I want to go to the US next year and to be able to rent a car or book hotel rooms we need to have enough available credit to do it. I learned last time by not having enough on my card and having Mom have to give her card just for the rental car. We paid for it out of cash, but they still demand the cards.

I hope to be able to pay it down enough for both of those at least, and then try to resist the temptation to use it while we're there. We're already going to need to get a loan to go because no matter how much I try to cut spending we're not going to have enough to go back next year, and I really need to go back next year. My Step Dad just died, my Step Mom & my Dad both weren't well late last year and I just found out my step brother lost his sight in one eye due to a clot recently. I don't want to leave a visit any longer.

And sadly I had to break down and put another Hire Purchase on. My computer of 5 or 6 years died. We've got it on interest free/deferred payments for 18 months at least. I'm paying a little extra on the account (it's got my wife's computer on it from last year still on interest free til next year) now that we've put something on it to get it reduced before the interest free stops.

So I haven't been great, but I have made some headway. A little at time.


PS- Edited to add: I like the needs/wants list idea. I started a wants list but haven't put a lot on it. I do need some new underware and some work shirts, I've been putting them off like I do many of my needs.

[jamethiel]

Well done on paying down one card! Keep us updated as to progress!

I know that while you're travelling you have to have it with you, but have you thought about putting your card in a sealed envelope while you're travelling? Enough to make you think "Do I really, really need this ?" Bring several envelopes, given that you know you need it for cars/hotel.

I find a needs/wants list really helpful. Mind you--needs doesn't mean I need it right now. Do i need a new mophead? Yes. Do I need it right now? No.

Also, it means that if something's on my list, if Target has a 60% off underwear sale, I can go "It's on the list! :D " and buy. And I'm honest about what i need and want. Do I need five tshirts? Absolutely yes, because quite often that's how long I go between having a full load of laundry and at the moment I don't own a single tshirt that doesn't either have holes, show my belly or isn't see-through. Do I need a haircut? Probably not. It's really damaged at the ends, and splitting up the length, but it's long enough that I can tie it back and look neat and professional and the undyed top half will stop it splitting sooner or later. So in my own copy of the spreadsheet, that'll be moved from the "needs" to the "wants" column.

[red_trillium]

I'm almost to having $900US available, which for me is really good. I usually get to about $200US available and then do the "I'm stressed I want to spend" thing. I did break down recently on the other card and am back to square one on that one (I didn't get as far on it) due to a few purchases. One was fully in the "want" category, the other in the "want, would be nice but not a strict need".

I don't carry my cards around any more, it's helped with some of the impulse purchases. Paypal is evil that way though, I don't need my card to be able to use it :S I am slowly getting better. I'll keep it with me when I travel but will try to be better this time around than I was last time when we went back. I'm already starting to think of things I'd like to do/eat/pick up when I'm there. I'd rather plan ahead to pick up one or two things than be subject to constant "I want" that leads to "I bought".

I hadn't thought to move things from wants to needs lists, that's a handy tip/thought. I'll revisit my lists and consider shifting things around. For example, I need new work shirts. I am supposed to look professional, wear business-attire. I need new business shirts, but do I need 5 or can I get by with 2 for now and put the other 3 in the "want" section? I need to replace the silvery tie I wear regularly, do I need another tie or two or can I look at my current selection and shirt colours and see what I can do? (I already decluttered and reorganised my ties the other day so I know better what I have and what I'd like to consider getting).

[falena]

Wow, thank you for writing this in-depth analysis. And congrats on everything you have achieved so far and good luck with the rest.
I especially like your want and need chart! It's such a brilliant idea, and I love how you organised it, I'm going to steal the idea and put it into practice immediately.

[jamethiel]

Thank you!

Yeah, I found that without the chart, I was either prioritising wants over needs (cause quite frankly, after I mop the floor once a week, my need for a new mop-head completely leaves my mind) or when I HAD money which I'd specifically put aside for spending, I'd not remember what I wanted and either impulse buy something which was useless/less wanted than something else on the list. And then a week later I'd remember what I really wanted to buy and go "D'OH!" and not have the money.

Also, my two month policy gives me a chance to evaluate wants. Yes, at the moment I really want Fyrrinae eyeshadow, but will I want it in a couple of months time? Already I've gone off the idea of a yoga mat, but I'll wait for a couple of months and then take stock. It's a good way of stopping myself from accumulating useless crap.

[dorothean]

This is a great post! I'll be keeping it around as it's so full of helpful advice.

I haven't done at all well with my original goal this year, which was to increase my savings. But that's because I've been taking courses which will lead (I hope) to a career I really want to have, and the courses will be over (probably) by midwinter, at which point I'll have a year or so when I can really concentrate on savings.

[jamethiel]

Thank you!

And absolutely, upskilling is the way to go if you can. I would have gotten into a lot less trouble if I had the skills from the get-go, but I couldn't really address the trouble I got into without a job with a substantial pay increase.

[holyschist]

Bookmarking this for if I ever manage to get a job that allows me to make > minimum payments (right now my income-based student loan payments are $0 and they're just racking up interest...extra to throw at the credit card and the car are just not happening. Neither are "savings").

One caveat about canceling a card after doing a balance transfer: if the vast majority of your credit history is on that card (as mine was--I have about 9 years of credit history on that card and, hmm, 2? on my current one), canceling it can be a Very Bad Thing for your credit score, affecting ability to get rental housing, among other things. I don't really have any problems with not using my credit cards, however.

Just quit my job from hell that didn't pay enough to live on and required living away from home; possibly about to get a job closer to home that still won't pay enough to live on, but I might be able to fill in the gaps with temping and freelance work. Still dreaming of a full-time permanent job that pays enough to live on, save, AND throw extra money at my debt.

(On the bright side, my car is about half paid off! And my credit card debt is down by ~2K. My student loans, on the other hand...racking up interest.)

[jamethiel]

well done on the credit card and car! I feel for you on the job thing- I reckon it took me a year after getting my current job to even start LOOKING at paying my debt down.

[holyschist]

I had a job, but it wasn't paying enough and is untenable, so. Back to the grind. Stupid job market. :-/

[jamethiel]

Oh, I had a job as well, but I HATED IT so much that it was soul destroying, and while I could... sort of, live on the money I received, I couldn't live on the money I got while I was so distressed, because I use money as retail therapy.

Ugh. So much of money is psychology.

Good luck on the job!

[aedifica]

For the last couple years I've making some progress instead of barely keeping my head above water, which is a huge relief, which makes it easier to keep making progress...

I've got a modified debt snowball: when I pay off a debt, instead of taking its *whole* monthly payment and applying that to the next highest interest rate debt, I'm doing that with *most* of its monthly payment, and returning a little bit of the money to my general budget pool. That way my budget gradually eases up over time, and I have a clear reward for getting that debt paid off. It works well for me; I do not claim it's right for any particular other individual.

[jamethiel]

Thank god for progress! What really made me feel sick with anxiety when I started trying to address my debt is that I just wasn't making a dent in anything. It took so long before I actually started seeing improvements from that. I ended up having to allow myself an extra treat at milestones ("OK, if I get my debt below $2500 with interest, I will treat myself to x") to keep motivated.

Modified debt snowballs are a great idea. So much of money is about psychology, whatever works for you is good! For me I found that sometimes once I got used to a certain way of living (bringing my lunches, etc) I didn't really miss it or need more money--by contrast, cutting out some things made me so anxious that it was better to allow myself $4 a week for a block of chocolate than deal with the financial fall out of not having any treats whatsoever, because I'd snap and overspend.

There's a very apt saying from ... I don't know where. "We can do without the necessities so long as we have the little luxuries." That's SO TRUE of me.

[aedifica]

So true indeed!

[indywind]

Having multiple accounts has really worked for me. I actually have accounts at 2 separate financial institutions (*). At the credit union, I have savings, checking, credit card, and a household checking account shared with my partner. At the bank, I have savings and checking.

I get may pay direct deposited to both: A predetermined amount goes to the credit union that covers my share of the household fixed expenses, a small (regular automatic transfer) amount to savings, and leaves a little extra which I allow to accumulate in between using it to pay off occasional credit card purchases. These are my "protected essentials" accounts. I don't touch them except to pay the budgeted bills, or use on occasional large purchases that are either long-planned so I have already saved up for them, or major emergencies I can't pay any other way. Almost everything is paid from these by electronic transfer,credit card or check--which I keep inaccessible most of the time.

The remainder of my pay and any other money I get goes to the other bank, where it gets split between savings and checking. The checking account is my "flexible spending" account for non-fixed essentials like food and transportation, plus non-essentials --entertainment, "retail therapy" etc. The savings account is my oops-I-miscalculated backup to the checking (overdraft fee is pretty low, but still deterrent). I'm pretty good about not spending more than is there (the thought of balancing all my flexible wants and needs against each other-- "I can get this bag of chips and bike to work, OR a gallon off gas for the car and eat beans, which would I like more?" keeps my impulse spending down), but it's oddly psychologically important to me to be able to spend money without having to scrupulously calculate so as not to accidentally run myself completely into debt over an occasional bag of chips or a gallon of gas. Keeping the flexible money completely separate lets me have that feeling of freedom, even if the amount of money is pretty small. At absolute worst I could only spend all the money I had at that bank... and my bills would still get paid and my savings would still be untouched at the CU.

(*Also have a 3rd financial institution, which hosts the Health Savings Account I can have with my employer-provided insurance. It also gets an automatic deduction from my pay, pre-tax, can only be used for medical expenses, unused portion rolls over and compounds interest indefinitely. Sequestered medical savings that I can't accidentally spend on utilities or food or "accidentally" spend on online ordering books.)

Just realized that a cornerstone of my management strategy is not just separating wants from needs, as our fearless host and others wisely do, it's actually setting up wants to compete against each other, but preventing wants from competing against needs --because wants have an instant-gratification advantage over needs, making it a real effort to make a responsible choice between them in the heat of temptation.

[jamethiel]

:D That's a really, really good way of putting it. I hadn't realised, but I do the same thing with competing wants against each other--like, "I have X to spend. I could save up to buy or buy this thing right now. Which do I want more?"

I try and automate everything as much as possible, then take out what I need in cash.

Every month, I plot out what I'm expecting to get and my regular expenses and transfers. I have three categories--leave in my bank account (for direct debits and regular transfers), take out as cash (food, groceries, driving lesson, public transport and mad money) and "Transfer to other accounts" which includes money put aside for bills and anything that I'm going to need in the off-pay week. I take out money once a week--everything gets transferred into labelled envelopes, so if there's anything left over from food, for instance, it gets carried over to next week. I've found I'm pretty good at keeping things for their intended purposes, so long as I do have some money scheduled for spending.

[shadowandflame]

Savings? What're those? :)

...yeah, I have trouble with setting aside money for savings while I'm still paying off debt. It is hard to do both at once. Once I've whittled my debt down to just the student loan stuff, though, I plan to build at least a small emergency fund (and stop relying entirely on my line of credit for that, which would be good).

[jamethiel]

Oh god, it is SO HARD. But having been caught once, I figure I'd better try it another way this time.

Good luck with both the debt and the emergency fund!

[all_adream]

I have no credit cards or credit card debt, although I used to. I still owe my mortgage but am paying extra to principal every month. I have been saving since my partner and I are buying a house soon, and I am pleased that this house has a little cottage on the same property, which is rented to the same person the last 11 years, so that will bring in steady income plus be a safe person right next door to keep an eye on things. School loan still exists and pisses me off since it is unrelenting and every option of reduced fees etc. has been exhausted over the years. Other than that, things are okay, not going into debt at all except to buy this house, with a partner who makes decent wages. sad to say, none of this would have been possible for me on my own wages without someone who works in a big city and makes better money around to share the costs.

[jamethiel]

... yeah. Where I live, real estate is really, really expensive. I'm kind of wanting to own a house, but I honestly don't see that happening by myself. Still, I'll save up for it and I can always end up putting it in my retirement fund.

I hope things continue well for you!