Paying With Plastic
Don’t let consumer debt sink your ship.
By former Army Capt. Phil Dyer, CFP, Deputy Director, Benefits Information

Debt and credit, used properly, can be powerful “force multipliers” in your financial life. A mortgage allows you to control valuable real estate with a relatively small deposit. Student loans allow family members to increase their earning power through basic and advanced degrees. But for many Americans, credit cards and deficit spending have become a way of life as they spend money they don’t have to support a lifestyle they cannot sustain.

According to the Federal Reserve Board, non-mortgage consumer debt, including auto loan and credit card debt, has reached approximately $18,700 for each U.S. household. For those who carry credit card balances, the average balance has reached nearly $12,000. Assuming an average interest rate of 13.9 percent, minimum monthly payments, and no new purchases, it would take roughly 30 years and nearly $16,000 worth of interest charges to retire the debt.

Signs you are in credit trouble:

• You are “maxed out” on one or more credit cards.
• You are making only the minimum monthly payments.
• You are applying for new cards and taking cash advances to pay off existing cards.
• You are missing payments or are consistently late on payments.
• You are using credit cards to buy essentials such as groceries because you can’t afford to pay cash.

If one or more of the items above apply to you, you might be headed for a credit shipwreck. It is imperative to make a debt plan of attack as soon as you recognize a problem. Here are a few plan-of-attack action steps:

1. Put away the credit cards. Go to a cash-only budget (this includes debit cards and checks). If you can’t afford to pay cash, don’t buy it. Studies show that those who pay with cash spend 15 percent to 20 percent less than those who use credit cards.

2. Make a debt list. Rank your consumer debts from highest interest rate to lowest, not by balance size. Always target the highest-rate debt first.

3. Contact all creditors and ask for a lower rate. You don’t have to suffer with a 16 percent or higher interest rate. If your first request for a lower rate is denied, tell them you will be moving your balance(s) to another account. Unless you have a bad payment history, vendors might cut your rate by 1 percent to 5 percent. Once you have done this with all creditors, re-rank your debt list from highest interest rate to lowest interest rate.

4. Attack the highest interest rate first. Make the minimum monthly payments on all accounts except the highest interest rate account. Put every extra dollar toward that account until you pay it off, then move to the next account on your list. As you pay off your debts, cross them off and note the date. It is a good idea to post the debt list where you will see it daily.

5. Consider taking a home equity loan or refinancing your mortgage. Consolidating high-interest, non-deductible consumer debt with a home equity loan or refinancing your mortgage can be effective if you don’t run up your credit card balances again. Unfortunately, many consumers do just that.

6. Don’t be afraid to get help. If you are getting calls from creditors or can’t get a spouse to stop spending, you might need to consult a consumer credit counselor. To find a reputable organization, contact the National Foundation of Credit Counseling at (800) 388-2227 or www.nfcc.org. Its staff can offer invaluable assistance in developing a debt-reduction plan and working with creditors. They also can help you avoid joining the 1.7 million Americans who filed for personal bankruptcy during the 12 months ending in September 2003, provided you contact them in time.