When the holiday-spending credit card bills start coming in this month, some of us will pay off the balance to zero and calmly go on as before. Others – many others – among us will add it to the ever-growing pile of debt, try to make a minimum payment on at least one card, and start another year of debt anxiety and cash crunch. If you’re in the second group, here are a few tips on how you might get out of the credit card crunch.
Understand bad borrowing behavior…and stop it!
You’re in a credit card crunch when you have multiple credit cards that you are unable to pay off in full and are having difficulty making minimum payments on some or all of them. You’re way past the “crunch” stage if creditors are sending past-due letters, calling you, or showing up at your door or place of work. (In this case, you need to consult your banker or other financial or legal professional.)
If you’re juggling credit card payments and living from paycheque to paycheque to make payments, try to pin down what you’ve been using your credit cards for. Have you made several large one-time purchases, for example, appliance or furniture or home renovations or some sort of emergency? Or do you use credit cards on whim or impulse for fashions, cosmetics, dining out, entertainment, even a daily latté or two? If your credit card crunch is the result of the latter, you’re engaging in bad borrowing behavior and you need to make some drastic changes.
Go back to first principles and make a budget. Determine how much you spend each month and subtract it from your take-home pay. Chances are, if you’re in a credit card crunch, you’re almost certainly spending more than you make. So you’re going to have to cut back on those impulse purchases using credit cards. It’s amazing how fast those “little luxuries” add up to big debt!
Take the credit cards that charge the highest annual interest rates out of your wallet or purse, and place them in an inconvenient difficult-to-access place. For some people, freezing your credit cards in a bowl of water works. Others put them in a bank safety deposit box. I’ve heard that some desperate people throw the things behind their fridge or stove. By the time you’ve moved that heavy appliance to get at your cards, the urge to splurge is gone. (Leave only one card with the lowest, most favorable rate available for emergency use.) In other words, your very first step is stop digging yourself a deeper hole! Make a rule for yourself: If you can’t pay cash (or use a debit card), don’t buy it!
The big payoff
Paying off large credit card balances that you’ve carelessly run up might at first seem an insurmountable task. But after you’ve put the brakes on your bad borrowing habits, and freed up some extra funds for the month, there are a few tactics you can use to start chipping away at the debt mountain.
- Make the minimum payment
- The zero-interest balance transfer promo
- Switch rates…for a fee
- Line of credit
- Loan consolidation
- Get the right kind of help
Start paying the minimum monthly payment on each card. Add an additional amount beyond the minimum to at least one card with the highest interest rate.
Consider transferring a high card balance to one of the zero-interest transfer promotions that start appearing in your mailbox at this time of the year. You could get breathing room of as much as six months with no interest. Any payments you make would go directly against your principal amount. But if you go this route, be sure to check terms and conditions after the interest-free period expires.
Talk to your credit card company (often your bank) to see whether you are eligible for a premium card. You’ll pay an annual fee, but the interest rate charged on these cards can be less than half that charged on no-fee cards. If you have large outstanding balances, what you spend on the annual fee (anywhere from $99 to $150 per year) will be offset by savings on compounded interest payments.
This is a tricky one. If you already have a personal line of credit, and if you haven’t maxed it out too, you might consider paying down some of your credit card balance using your line of credit. Interest rates are considerably lower on lines of credit, so you’d be reducing the overall interest rate hit. On the other hand, if it’s a secured home-equity line of credit, you in effect have a second mortgage on your home. If you don’t pay that as stipulated, the bank can seize your home. Use personal lines of credit sparingly.
Another tactic is to speak to your bank about a loan consolidation. In other words, you’ll be taking out a personal loan at lower interest rate to pay off other higher-interest credit-card loans. Your bank’s loan officer can work out a payment schedule to fit your budget. But you’ll have to make a promise to yourself to lock away all but one (preferably low-interest) credit card until that personal loan is paid off.
And don’t use “point collection” as an excuse or rationale to avoid getting out of the credit card crunch. Loyalty points are worth far, far less than the high interest credit companies charge on credit cards. Credit card companies know this, and trade on it. For example, Visa Inc., the world’s largest credit card company, reported net earnings of US$1.19 billion in the August-September period, while rival MasterCard Inc. posted revenues of US$879 million. Lending is lucrative; borrowing is not. Don’t play the game! If you’re a points addict, use non-credit-card-affiliated programs only until you’ve dug yourself out of the hole.
Finally, be skeptical of so-called “credit counselling services,” especially of the strip-mall, store-front variety. You may end up in an even worse debt crunch than before. If you’re concerned about credit card debt problems, talk to your bank first or consult with a fee-for-service financial planner or advisor.
Getting into a credit card crunch is easy. But the bottom line is that getting out is difficult and often financially painful. Above all, avoid declaring personal bankruptcy, even though this might appear to be the “easy” way out. Bankruptcy is a legal morass and will impede your ability to borrow and conduct your other personal financial and business affairs, including investing, for years to come. So make every effort to fix your credit card crunch using the tactics I’ve outlined here. It takes persistence and fiscal discipline, but it can be done.
© 2014 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.