Get Yourself Out of Credit Card Debt and Start Over
If you are one of the estimated 50 million Americans who are drowning in credit card debt, know that while it may not be easy you can get out of debt.
Figure Out How You Got in Credit Card Debt in the First Place
Ask yourself how you got there. Be honest. Did you buy things you wanted or things you needed? Recognize that whatever got you into credit card debt is going to keep you there if you don’t change how you spend money. If you are drowning in credit card debt, STOP USING YOUR CREDIT CARDS.
Use the DOLP® (Dead On Last Payment) Debt-Reduction System
If you can afford to make the minimum payments on your cards, use Bach’s DOLP system to prioritize your debts and their payments. The DOLP system works by identifying the card you can pay off quickly and then having you pay it off first. Fill out a DOLP worksheet (free at Finishrich.com/dolp), writing out the name of each account you have, the outstanding balance you owe, the minimum monthly payment, and the payment due date. Then give each account its own DOLP number, which you calculate by dividing the outstanding balance by the minimum monthly payment. Assign a DOLP ranking for each account, with the account with the lowest DOLP number ranked # 1. Enter the payment due dates for all your credit accounts in a calendar system with it set to remind you of each due date in advance so you won’t make any late payments. Then start paying down the debt the DOLP way by making the minimum monthly payment on every account except for the one with the # 1 DOLP ranking. For that card, make as big a payment as you can afford–ideally, at least double the minimum. Once a card has been paid off entirely, retire it (but don’t close the account) and start paying down the card with the # 2 DOLP ranking. Repeat until you have paid off the full balance due on every card.
Get Your Credit Card Interest Rate Lowered
First, know the rate you are paying on each of your cards (listed as the “annual percentage rate” or “APR” at the bottom of your most recent credit card statement). Second, find out how your interest rates compare to the national average by visiting a website like Bank Rate, Low Cards, or Card Trak. Make sure you are being charged a fair rate for your category – super-prime (for the most creditworthy); prime (for average borrowers); sub-prime (for below-average borrowers); promotional (for new customers); and punitive (for those who’ve broken the rules by missing payments or exceeding their credit limits). You’ll know what category you fall in by checking your credit score. Use this information when you call the credit card company to request a lower rate.
If You Can’t Afford to Make the Minimum Payments
Take advantage of Help With My Credit, a resource for struggling consumers created by a group of major card issuers, including Bank of America, Citi, Discover Card, and the Visa and Mastercard networks. Ask the credit companies about their “debt-management plans.” You can get your interest rate slashed (sometimes eliminated entirely) in return for signing on to a guaranteed repayment program in which payments are automatically debited from your checking account monthly.
If card companies can’t help you, contact the National Foundation for Credit Counseling. Beware, however, of “debt-settlement companies” that offer to negotiate a settlement on your behalf with your creditors, often promising they can “wipe out your debt or cut it in half.” Many of them simply steal your money.
What to Do If Your Credit Card Debt Has Already Been “Charged Off”
If you’ve gotten really behind on your credit card payments, the credit card company may write off the debt as a loss and sell it to a collection agency. If this has happened to you, get copies of your credit reports and check if the debt shows up as having been “charged off.” If it does, the damage is basically done and the charge off will stay on your credit report for up to ten years (depending on your state) bringing down your credit score.
Time Barred Debts–Read this Before You Settle
If you are being harassed by a creditor, find out the statute of limitations on time-barred debts. Go to FTC.gov and search for “time-barred debts.” You may find that your debt has already cleared the date when you can be sued by a creditor. If you settled now, you may re-start the time this negative mark appears on your credit record! Do not settle anything until you know your rights.
Once you start to reduce your debt, here’s what to do next:
From “Start Over, Finish Rich: 10 Steps to Get You Back on Track in 2010”
REBUILD YOUR EMERGENCY SAVINGS
My Grandma Rose Bach used to tell me, “David, when the going gets tough, the tough have cash.” In this, as in so many other things, she knew what she was talking about. Cash is king. Cash is security. Cash is protection. This is a lesson too many of us have learned the hard way in the recent downturn. It’s one thing to have your credit cards maxed out and your home-equity line closed down by the bank. But then add in losing your job and your income–and, well, it can get pretty darn bleak.
The fact is that without a cash cushion, we are only one job loss or one emergency medical expense away from disaster. This is why we all need a rainy day fund–a cushion of emergency money that can keep us afloat when times are tough. Unfortunately, in recent years, Americans have been really terrible a bout saving for a rainy day.
The good news is that there are signs millions of us have woken up to the need to increase our savings since the recession hit. After hovering around zero from 2005 through early 2008, the U.S. savings rate climbed past 5% in the spring of 2009. As the Los Angeles Times put it, “Given the economy’s crash, many people clearly have gotten religion about saving money.” And so should you–right now, this minute. Trust me, 2010 is the year to beef up your emergency money.
“WHERE DO I FIND THE MONEY?”
The biggest obstacle to setting up an emergency fund isn’t convincing yourself that you should but convincing yourself that you can. I can’t tell you how many students and clients of mine over the years have said to me something like this: “Come on, David, let’s get real. I can barely make ends meet as it is. How can you possibly expect me to scrape together several thousand dollars and just leave it sitting in a bank account somewhere?”
My answer is that it’s not as impossible as you think. To begin with, there’s the Latte Factor: you could easily be wasting 5 to 10 dollars a day–maybe a lot more–on unnecessary expenditures. This money would do you a lot more good in a rainy-day fund. Indeed, your first priority with any money you save by fixing your Latte Factor should be funding an emergency account.
Now, by themselves your Latte Factor savings may not be enough to build a big financial cushion very quickly. Especially if you’re starting from zero, you’re going to have to dig a bit deeper in order to get an emergency account fully funded anytime soon. This could mean temporarily giving up something that may be important to you but isn’t actually essential–like premium cable or eating out or taking cabs instead of the bus. It may not be pleasant going without something you’re used to, but, hey, this is a priority. And, anyway, the sacrifice won’t go on forever. As soon as the balance in your rainy-day fund is where you need it to be, you can go back to watching HBO.
Again, I know what the objections to this approach are going to be. “But, David,” people say to me, “even if I could reduce my spending on paper, I just don’t have the willpower to actually do this in real life, day in and day out. It sounds like going on a diet–and we all know how those end up.” My answer to this is that there is a way to put aside money for your rainy-day account that doesn’t involve willpower or discipline or stick-to-it-iveness. What you do is make it automatic–that is, you arrange to have a portion of your pay automatically deducted from your paycheck and deposited in an account you’ve set up just for this purpose. (You could put your rainy-day money in the same account you use to pay your bills, but I don’t think that’s a good idea. When you keep your spending money and your emergency money in the same place, it’s too easy to dip into the rainy-day fund for monthly expenses–and before you know it, your emergency fund will be gone.)
The great thing about automating your rainy day fund is that once you’ve set up your automatic saving system, you no longer have to think about it. And if you don’t have to think about it, there’s no chance you’ll forget to do it–or, worse, change your mind and deliberately not do it.
Excerpted from START OVER, FINISH RICH: 10 Steps to Get You Back on Track in 2010 by David Bach © 2009 by David Bach. Reprinted by permission of Broadway Books.
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