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?