I caught a great post at Moolanomy last week that described the five stages of financial health. The first stage, which Pinyo labeled “The Debt Spiral,” is an especially tough one to move beyond. Over the last few months of writing about personal finances I’ve received several emails from readers with variations of the same problem–credit card debt is suffocating them. Often they can’t pay credit cards, their mortgage, or their car note. Most of the messages go something like this:
We are making minimum payments, but don’t have enough cash to live off and to ‘float’ until the end of the month we have to use credit cards again. When I get my next statement the balance, including a few new charges and interest, is right back up to where it was last month, or higher!
I’ve been on this hamster wheel myself and it is not a fun place to be.
So how does one begin to gain traction and actually reduce credit card debt without adding more to it?
Stop spending with credit cards. Take a hard look at the expenses you’ve charged recently. What things could you have lived without? If these expenses were necessary items (food, gas, power bill, etc.), what other items could be cut from your monthly budget to make room for these expenses? You are in a hole, and at some point the only way to move towards climbing out is to stop digging. For the remainder of this plan to be successful you must adhere to this first step and vow to never swipe the card again.
Make two payments per month. Credit card interest is charged on what’s known as the “average daily balance.” If you add up your ending balance every day of the month and averaged it, that is the figure that is used to calculate how much interest you pay your card issuer. One way to drive this figure lower is by making two half-payments each month, at roughly the half-way point in your billing cycle.
Ask for a lower rate. If you are unable to get a low-interest consolidation loan to pay off credit cards, you may have luck getting your current card’s rate cut. Many personal finance books advise you to call up your card issuer and simply ask for a lower rate, which they report happens with predictable success. I haven’t personally had that experience with credit card issuers. And as a former employee of a credit card issuer I can tell you that approving rate reductions is not the norm. However, there are a few things for you to consider before calling up your card issuer, in much the same way you would gather some numbers before asking your boss for a raise.
- Are you a good customer? I don’t mean you pay your bills on time, or pay off your balance as soon as the statement arrives, I mean are you a good customer from the bank or card issuer’s perspective.
- Are you a profitable customer? Take a look at your last six months worth of statements. How much interest have you paid? If you frequently roll over a balance each month, carry a relatively high balance, and don’t have a record of late payments, you will likely have success negotiating a lower rate. However, if you are habitually late, or do not carry a balance over from month to month it may be more difficult to convince the issuer that you are a profitable customer.
Double up. If you are stuck with a particularly high rate, and the issuer refuses to lower it, try to double the amount you are required to pay. Credit card companies aren’t dumb. They know that by requiring you to pay only 2% of the balance you will be mostly treading water after the majority of that minimum payment is allocated to interest charges. Pay more than the minimum as often as you can.
Get that fee waived. Most issuers will remove a fee one or two times per year for good customers. If you were nailed with a late fee last month, but have since made amends, you may have luck calling the card issuer and asking to have the fee reversed. This will help bring your balance back down, but won’t lower the current month’s payment due.
Increase your income. There are only so many tricks one can try to reduce their monthly credit card balances. In the end, it is all about decreasing your expenses and increasing your income to free up more cash to be applied to debt. If you can’t pay your credit cards in full, consider taking on a part time job, or asking for overtime at your full time job. It isn’t fun being away from family to work extended hours, but it is only temporary. Use every single penny that is earned from this additional work to pay down credit cards.
Available credit is not an invitation to charge. After you’ve made some progress at eliminating debt card issuers will be on to your plan and start sending out teasers for balance transfers or convenience checks citing your available credit as a potential source of funds to remodel your home or take a cruise. I know it seems tempting, but remember that promise you made in the first step and hold steady. To run balances back up would undo all of your hard work put in up to this point.
Making only the minimum payments on your credit cards can be very costly over time. But having a less-than-ideal credit card can be expensive as well. Take the time to investigate some of the introductory 0% interest credit cards to help save money on finance charges. If you like to travel but want to save money, even look to some of the better airlines rewards cards that are still available.