The holiday season may not have been the blow-out retailers were expecting, but it was still pretty good — with sales up 3 to 4 percent on average. And it was great for credit card companies. Visa reported a 10 percent rise in items charged between Thanksgiving and New Years. Unfortunately, that means that right about now you're opening credit card statements that are chock-full of evidence that you overdid it — maybe by a little, maybe by a lot. But what steps can you take to pay back that debt and get on the right financial footing for the New Year?
Lock up your credit cards
There is, if you're honest with yourself, very little that you charge that can't be paid for another way. So put your credit cards on hiatus, stick them in a drawer, lock them in your safe deposit box, do whatever you need to do to keep yourself from using them until you get your situation under control.
Buy only what you need
Every time you go to spend money while you're digging your way out, ask yourself: Do I need this? A pair of pants at the Gap? The answer is no, even if they're on fabulous sale. A new transmission for your car so that you can get back and forth to work? That depends. Is there another way for you to get there? Could you catch a ride with a coworker until you had the cash to pay for the parts? Could your spouse drop you off and pick you up? If you're really in a bind and there is no other way, then you do what you have to do to get to work. And that probably means charging it. But you also make sure you don't allow yourself slack anywhere else.
Lower your interest rates
As long as you're pretty good at paying your bills on time, chances are your mailbox is still full of credit card offers. The average cardholder receives no fewer than 5 a month. And they're still offering pretty good teaser rates. I got an offer from MBNA Worldpoints offering zero percent on balance transfers and 7.9 percent fixed on new purchases through September. Transferring balances to a card like that would give you the opportunity to make headway on your payments. Be more cautious about consolidating with a home equity loan or line of credit. You have to remember that although the interest rate is more attractive (home equity lines of credit are widely available in the 4 to 5 percent range — and that's before you factor in the tax deduction on mortgage debt) your house is on the line.
Pay as much as you can
A credit card company's idea of a good customer used to be someone who could pay a decent chunk of their bill each month. No more. Today, they want people who can't pay more than the minimum payment. Worse, over the years, they've reduced the minimums you must pay to 2 percent in many cases. But here's what happens. Say you owe $8,000 on your credit cards at an interest rate of 19 percent (many people with significant debt owe much more and are being charged interest rates in the 25 to 30 percent range).
If you pay the minimum, two percent payment each month — or $160, it will take you 100 months to get out of debt and you will end up spending $15,976 by the time you're done. (Nearly double your original purchases).
If you pay one percent more than the minimum — $240 a month, you'll be out of debt in 48 months and you'll end up spending $11,463 by the time you're finished.
And if you find the money to pay double the minimum — $320 a month, you'll be out of debt in just about two and a half years, and will only spend just over $10,200 all in.
Find money you didn't know you had
The question for many people is where you find that extra money when you're already feeling squeezed. After all, if you had the cash to begin with — or knew that you had it — you probably wouldn't have put these purchases on your credit card. In addition to evaluating your expenses (each and every one of them), you may also want to look at getting a second job. Although the employment report — out last week — was pretty dismal, we did see a bright spot in the area of temporary help. So in addition to poring the classifieds, you might want to see if you could pick up some extra temporary work to make ends meet. You may also consider selling assets, not just small ones (though you can unload those on eBay) but that second or third car if its a luxury you really can't afford.
Work with us, to "Pay it Down Today"
Debt is one of those problems — like obesity — that we in American just can't seem to conquer. Try as we may, it continues to get worse, with consumer debt, credit card delinquencies, automobile repossessions and house foreclosures at all time highs. So all this year, we've decided to run a continuing series to help you get out of debt and get your financial house in order. We'll be offering you tools on our Web site as well as helpful information on air and right now, we're looking for a few viewers that will allow us to follow them along, every month, as they work to pay down their debts.
We will — over the course of the year — work with you on figuring out why you got into trouble in the first place (so that it doesn't happen again) as well as which debts to pay first, understanding and improving your credit score, poring over your budget to find extra money you can use to pay down your expenses, dealing with creditors if they come calling, evaluating whether credit counseling is a necessary step and addressing any of your individual issues.
Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Information provided courtesy of Jean Chatzky and Money magazine. Copyright © 2003. All rights reserved. For more financial advice, visit the Money magazine Web site at: