Put on Extra Debt During Holidays? Time to Shed It
February can be a make-or-break month for indebted consumers.
“By that time, most of the charge card statements have found their way to mail boxes,” said Paul Richards, executive director of the Institute of Consumer Financial Education in San Diego. “That’s when folks realize just how badly they behaved over the holidays.”
The rising tide of layoffs and declining opportunities for earning overtime pay could make this February the most difficult in years for consumers with heavy debt loads, experts say. Consumer debt grew at a record pace in November and late payments hit a three-year high--and that was before the Christmas holidays.
“Some people cut down on their spending a bit, but a lot of people who didn’t have money to start with probably went deeper into debt,” said Kristy Welsh, president and editor of CreditInfoCenter.com and author of “Good Credit is Sexy” (Techartists Publishing, 2001).
Consumers who find themselves overwhelmed by holiday debts need to take quick action, Richards said.
“The main thing is to get yourself operating on cash, so you don’t continue in that downward spiral into indebtedness,” he said.
Here’s a five-step process for getting out of debt:
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Step One: Assess Your Situation
Make a list of your credit card bills and their minimum monthly payments, as well as the interest rate and the total amount owed on each card. Add up the minimum payments and the amount owed.
Do you have nonretirement savings sufficient to pay off the debts? If so, use it--especially if it’s sitting in a low-yielding bank account or money market fund. Earning single-digit interest on your savings while paying double-digit interest on your debts is folly.
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Step Two: Create a Repayment Plan
If you can’t pay off your debts immediately, compare your minimum monthly credit card payments to your discretionary income--what’s left after the mortgage, car payment and other required monthly bills are paid. If your discretionary income is higher than your minimum payments, use the extra cash to begin paying off the debts. (If you have more bills than income, skip to Step Three.)
There are two common repayment strategies, Richards said. One is to make only minimum payments on most debts and use whatever money is left at the end of each month to pay down the balance on the card with the highest interest rate. When that card is paid off, attack the balance on the second-highest-rate card, and so on until every credit card is paid off.
The other strategy is to pick off the low-balance cards first, Richards said. This provides a psychological boost to those who need to see progress, but it’s not as effective as getting rid of the high-rate cards first, Richards said.
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Step Three: Trim Discretionary Spending
If the total of your minimum payments is more than your available funds, look for ways to cut your spending. Take an hour to jot down a simple household budget, indicating how much money comes in each month and where it goes.
Look first at discretionary spending--everything that doesn’t have to be paid each month--and try to find ways to cut reduce it, said Matt Coffin, chief executive of LowerMyBills.com.
For instance, if you have cable TV, ask your provider to suspend your account for several months. Most cable companies will allow customers to temporarily stop service, which could save you $30 to $50 a month that could be applied against the credit card bills. The same holds true for gym memberships.
Can’t live without cable or your workout? Consider firing the maid, washing your own car or going out to eat less often, Coffin suggested. Giving up every luxury might be unrealistic. But most families can trim at least some minor expenses that could provide money to whittle down the credit card bills.
Be particularly careful about late fees, Coffin added. Whether it’s paying the bills or returning rented videos, being a day late costs money and provides nothing of value.
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Step Four: Bargain Hunt for Necessities
If you haven’t shopped for auto insurance, homeowners insurance or long-distance phone service recently, you probably could save money if you did, Coffin said. Also, anyone paying monthly service charges on a basic bank account might save money by switching to an online bank.
Using coupons for grocery shopping also can save money. Richards said the 20 minutes he spends clipping coupons from the Sunday newspaper saves him hundreds of dollars a year.
Dry cleaning, auto supplies and tools also are available at discount prices if you’re willing to shop around, he said.
“I don’t like the negative issues--the idea of having to cut back,” Richards said. “I prefer to get more value for the dollar. All that takes is some comparison shopping.”
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Step Five: Stay on Track
You don’t need to cut up your credit cards if you’ve overspent--in fact, that could hurt your credit rating and cost you money in the long run, Welsh said. But you should make a point of keeping your spending in line.
The best-case scenario is to pay off your credit card balance every month. If you must carry a balance, confine it to one card with the lowest rate you qualify for.
Never go over your credit limits and never pay your bills late, Welsh said. If you do, you’ll get hit with penalty fees. Moreover, it hurts your credit rating, which gives lenders reason to hike the interest rates on your debts, putting you even further behind.
“Once people get behind, they get bad credit and then the interest rates on their credit cards get higher and they just get poorer,” Coffin said.
“If you have debt, make a few sacrifices now. Otherwise, you’ll never get out from under it and you never get ahead.”
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Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns visit The Times’ Web site at www.latimes.com/perfin.
