The Pitfalls of Plastic

 

Think about this:  If you have $25,000 in credit-card debt at an interest rate of 22%, and you make only minimum payments (2.5% of the running balance), it will take you 53 years to pay that debt off.  And you will pay a total of $67,590 in interest.  That’s staggering, and it gives us an idea of the malignancy of unsecured debt.

I’ve learned the hard way, folks!  6 years ago, I found myself in poor financial condition; overextended and swimming in credit card debt.  And it didn’t happen because of over-spending or shopping addiction; rather, it happened because of outside circumstances. I was also guilty of inattention.  What got my attention was a letter from a credit card company indicating that I was in default (1 day late with the payment), and my interest rate would now be 36%!  That’s when I put together a legitimate long range plan to get my finances in order.

Here are the elements of debt reduction and re-direction that worked for me:

1. Stop adding to the debt.  You really must understand the severity of the situation and then you need the discipline to stop the negative movement.  Remember that it is just business!  Try not to be overly emotional.
2. If you are in default on a payment, try to negotiate with the credit card company to lower the rate.  That didn’t work for me, so I negotiated a line-of-credit with another company at a rate of 15% with a fixed monthly payment.  That isn’t a great rate, but better than 36%, and the reduction of this debt was fixed by a monthly payment.  I always tried to pay more each month.  To negotiate this line-of-credit, I explained my situation and strategy to the representative at that company. Credit score?  Under 600 (poor).  I was losing sleep! 
3. Cut expenses and be frugal.  Shop for sundries at the dollar store, and cut all unnecessary expenses.  Look in every area of your life to reduce expenses.
4. Try to look for new ways to increase income, and use the income to pay down debt.  Unsecured debt is more expensive than the interest earned on savings, so at this point, pay off as much as possible rather than save.
5. Try not to get discouraged when the unexpected happens.  When it does, and you don’t have the reserves to handle the situation, use the lowest interest debt instrument you can to pay for unexpected expenses.  Believe me, sometimes it looks like you are not making progress.  In the long haul, however, you are moving ahead if you stick to the plan.
6. Try to leverage the equity in your home and refinance your mortgage at a fixed rate.  Here, dealing with a well-established bank is your best bet.  Stay away from shady mortgage brokers and on-line hucksters.  I refinanced in 2004 at a rate of 5.79% for 10 years using a large and established bank.  Remember that mortgage interest is tax deductible, unsecured interest is not.
7. Again, don’t add to the debt!  As of February 2008, my credit score is 750 and climbing.  And now I am saving money.  I sleep better too!

The bottom line is this.  Getting out of unsecured debt isn’t impossible.  It takes spending discipline and a “never give up” attitude.  It is made more difficult by this superficial, media-driven, materialistic world, but the reality is that “things” never make us truly happy.  Think about just how long having the new car remains appealing; the excitement wears off in about a week! 

Here are some good links:

Credit Card Interest Calculator (my spreadsheet) (30 sec. on DSL)

National Consumer Law Center

Myvesta

Comments

[make money online]

The owner sat on this property for 54 years and although they will still make money on the sale, they would have made much more if the property came on the market say 2 years ago. Houses similar to this were selling for 400- 500k back in the early 2000s. With all the bad news (or good news, depending on how you look at it) in the market lately, it’ s not completely unrealistic to see prices fall back to 2002 levels.