I'm trying to help a buddy of mine get out of credit card debt

In My Humble Opinion
1

OK, I’ve got a friend who has about 15-20K of credit card debt that is really handcuffing him right now. He has a hard time making more than the minimum payments, which leads to him not making much of a dent in the balances. He does work hard for about 50-60 hours a week, but these bills pretty much keep him from doing more than breaking even financially. He does pay all his bills on time, but I don’t think he has any savings at all.

Up until now, he’s basically just been paying his bills as they come in, and getting killed on interest. I’d say this has been going on for about 2-3 years or so. Is there a better way for him to go about this? Maybe a loan from a bank at a more reasonable rate? I’ve heard of debt consolidation (mainly on late night tv commercials), is this a real option or how do you do something like this?

He’s really trying to keep up his credit, so he’s only considering options that would not hurt it at all.

Any advice for him?

2

He should see a professional debt advisor.

3

I had a similar problem a few years ago, though nowhere near as bad as that. I went and got a bank loan over a 5-year term, paid off the card with the loan, and then had a regular schedule of loan payments.

I then did something that helped me immensely in a psychological manner: I opened a second bank account. I calculated all my outgoings per month - loan, bills, house payments, insurance, etc. - and whenever I got paid I transferred that into the new account, and paid everything from that. What was left in my regular account was “mine” to spend. This allowed me to keep within a realistic budget.

I also (possibly foolishly) kept the credit card, but pledged that I would always pay immediately whatever I put on it from my regular bank account - this is made a lot easier with internet banking.

Don’t have your buddy go down the TV debt consolidation route: they have notoriously high interest rates.

4

One suggestion I have heard is to pay off the lowest balance first, not the highest interest rate. This is mainly for people with habitually poor spending habits. Once the lowest ballence is paid totally you take that ‘extra money’ that you now have from not having to pay that anymore and apply it to the 2nd lowest balance. Continue till everything is paid off.

The reason is to actually see real progress, and see a acceleration of paying off debt.

(and hopefully he is not paying for Cable/Sat TV)

5

Some strategies I’ve used with others…

Push the interest rate they are paying as low as possible - If he has a couple of credit cards he probably gets mail from them enticing him to “transfer balances”. Often they offer lower interest rates for the life of the balance tranfer. Take a look at what the interest rate is on the balances he is currently paying. Through creative transferring (it takes a couple of months to time this right) you can get all of the debt down to lower rates. This only works if he has a few cards with available credit, and gets the offers. It may even be worth opening a new card account just to take advantage of the tranfer rate offer. (Don’t worry too much about the affect on his credit score, if he went to a bank for a consolidation loan, it would hit his credit the same way.) The gal I helped was able to drop her average interest rate from 15% to ~6% this way. She still has a chunk to pay off, but she is able to apply more to the principal.

DO NOT USE THE CARDS THAT HAVE THE TRANSFERRED BALANCEs! - All new purchase charges will be billed at the regular higher interest rate (not the transfer rate), AND the credit card company will only post his payments against the lowest balance first. This means he will never begin paying on the higher interest charges until the lower interest tranfer is totally paid off. That pair of shoes or dinner looks pretty lame after you’ve racked up hundreds of dollars of interest before you even begin paying it off. Suckage.

Pay more than the minimun due - This should go without saying, but I’ll say it anyway. Come up with a set amount and pay that every month. If the minimum is around, say, $270, try to pay $350 a month, every month.

If he must use a credit card at all, pick one with no balance on it and pay it off completely every month - Yes, it takes lat’s of discipline. No, it’s not easy. But you have probably heard the old adage, “when you are in a hole, the first rule is to stop digging!”

Just some thoughts, I hope they help, good luck!

6

That may make a certain sense psychologically, but it is not the fastest way to get square, which is:

Make minimum payments on all but the highest rate debt. Pay as much as possible on that account each month, until it is paid down to zero, and then start in on the next highest rate, and you now can add the minimum payment your not making on the zero-balance account, so while it starts out slow, there is a building of momentum.

This approach minimizes the interest charges.

Is he a member/can he join a credit union? These often have debt counsuling available to members, and may (eventually if not immediatly) be able to consolidate his accounts at a more reasonable interest rate.

I mention the CU approach, because there are plenty of folks operationg debt consolidation scams. The CUs are almost certainly on the up and up.

7

The first and foremost thing he needs to do is make more than the minimum payments, even if it is only 10 or 50 dollars. Just as an exercise once, I did a spreadsheet of minimum payments on a high-interest credit card. The balance never reached zero, and if you think the banks haven’t figured that out…

Stop living beyond his means (if he hasn’t already).

Every windfall of cash he gets (tax return, bonus, whatever) goes straight on debt reduction.

Call the credit card companies and simply ask them to reduce the interest. The worst that will happen is that they won’t - they won’t make it any higher from his asking, though.

Get a low-interest line of credit from the bank and transfer all the balances to that, then attack that balance like it was trying to murder your family.

$15-20,000 in debt is high, but it’s not killer. If your friend isn’t on a budget yet, he should be. He should be recording all of his expenditures every month to see where his money is going - it isn’t hard to blow hundreds of dollars on things like lunches and coffee without even realizing it. Next he should sit down with an Excel spreadsheet and plot all of his paycheques and all of his expenses - once the necessary stuff is taken care of, everything that’s left is thrown at debt reduction.

Make payments on the debts whenever the money is free according to the budget, rather than just once a month. If the money sits in the bank, chances are he’ll spend it. Once the money is used for a payment, it doesn’t seem to be missed as much, or you just tighten your belt a little until the next paycheque.

I used this method to pay off $12,000 in student loans in about three years. We need to get disciplined about our current debt load and get that paid off now, too.

8

Correct, it is not the fastest way mathmatically, but a efffective way to deal with it on a psychological level - which may give someone the motivation to follow it through - some/many people may not need this, but some/many others do.

9

My husband and I ran into this problem in the first few years of our marriage. We contacted an agency through the United Way that contacted the people we owed money to and had the interest rates reduced dramatically. We then paid the agency a set amount each month, which they paid the companies we owed. While there was a small fee for this service, it was nothing like the ones charged by the ads you see on television - something like $10/month. We were able to completely pay off our credit card debt in less than 5 years.

It might be worth it for your friend to check with the local United Way and see if they have a similar program.

10

To be positive about this, I have a friend who got rid of £20,000 on credit cards in just three years - he went nuts in 2002 and bought two huge sports bikes, and went skiing about 20 times - just through new-found self discipline about repaying and not using his cards. Now, a year later, he’s used this new skill towards getting the deposit together for a house.

11

Thanks for the advice and for taking the time to give this advice. I’ll definitely be passing these ideas on to my buddy, I think they’ll really help him. I can provide a little more background on his situation for those interested:

He owes around 15K on one credit card, I’m not sure of the interest rate but I think its in the neighborhood of 10%.

He’s got 1-2K more on a handful of store cards too I think. He’s been making progress on these and is close to knocking them out.

He does have some kind of student loan out there too, that one is also for a few thousand, but as far as I know this is the least of his problems and he’s just making minimums on it.

Besides this debt, he does have car payments of about $250 a month or so. He’s always kept current on his auto loan, but I don’t think he pays over the minimum. This loan has a good rate too, so its down the list of priorities.

As far as how he got into this debt in the first place, I think its pretty much evenly distributed between some bad luck, honest mistakes, and occasionally living beyond his means. He has really improved as far as I can see however.

12

Call the student loan companies and get a deferment. Use that money to get the store cards paid off. (that will help psychologically).

Call the credit card company he has the larger debt with and work with them to get his rates reduced. Since he’s working, he probably shouldn’t apply for bankruptcy. If he loses his job, don’t hesitate to go bankrupt. It won’t take care of the student loans (or the car, unless he wants it repossessed), but it will prevent his suffocating under all that unsecured debt.

13

Blunt, here’s a version of what I posted in another thread:

From someone who has been there, done that, and doesn’t want the T-shirt… perhaps this will help. I don’t know where your friend is; I’m in Ontario, Canada.

Six years ago, I was exactly where your friend is. I was in over my head, and going down fast. I went to see a credit counselor.

In Ontario some of these credit counselors work for a charitable organization funded by the regional government. I have heard that there are profit-based ones in the States, and you have to be more careful.

The counselor helped me to plan and budget things, but after a few months, it wasn’t enough.

I went to a trustee, who took over my financial affairs and took away my credit cards. On his advice, I entered a Consumer Proposal , which is one step short of bankruptcy. I declared all my debts, and the trustee put together a legal plan for partial repayment, and sent it to all my creditors. Under Ontario’s Consumer Proposal law, if a creditor does not dispute the proposed repayment plan within 45 days, they must accept it.

No-one disputed, and I started making repayments. The trustee kept any creditor calls off my back. One collection agency kept sending me letters and calling; I simply forwarded the letters to the trustee and told the callers that under the proposal which the creditor had accepted, they were not allowed to call me. If there was a problem, they had to take it up with the trustee.

Your friend may need to reduce non-debt expenses. He may have to start selling assets. I have no idea of his situation, but generally this means that things like cable TV, cellphones, eating out, extra features on the phone line, etc, all have to be reviewed. If necessary, can He move to a cheaper locale? Get rid of a car? These are the unpleasant decisions you may need to look at.

The credit counselor will look at all this with him.

14

Someone mentioned how you can really blow money on the little things. I’ve seen it.

Keeping track of Every Damn Little Expense is a pain in the rear, so I don’t do it constantly, but I do it whenever I move or get a new job. Your friend may find it useful.

You don’t need anything fancy, but you do need something that you will specifically use to “track expenses”. I’ve used both notebooks (where I didn’t write anything else) and excel sheets.

I use one column for cash income (gifts); one for bank income (salary, tax return); another for cash withdrawals from the bank; another for regular expenses (rent, utilities, debt payments); another for irregulars (groceries, clothing, movies); one for one-shots (how often do you buy a new washer?). Two final columns tell me how much I have in the bank and how much on hand. Everything is color-coded: income black, ATM green, expenses red, money available blue.

I’ve seen people who had breakfast at McD every day because they couldn’t be bothered get out of bed 5 minutes earlier wonder where their money went. To MickeyD, dearie…

15

Yup - let’s say you’re a working dude, working five days a week: $2 a day for morning coffee, $5 a day for mid-morning coffee and snack, $8 a day for lunch, $2 for mid-afternoon coffee - I don’t even want to add those numbers up. That’s $17 a day; $85 a week; $368 a month; $4420 a year. Yikes.

16

You can also lose some weight by not doing those things- fancy coffee drinks and restaurant lunches tend to be loaded with calories. I know that when I started drinking Slim-Fasts for lunch instead of going to the cafeteria, I lost weight and had lower credit card bills each month- a nice win-win situation. That’s an extreme example, but you could probably do the same by bringing in low-calorie frozen dinners: at $3-4 each, they’re cheaper than restaurant food.

If your friend doesn’t know how to cook, he should learn- restaurant meals, takeout, delivery, and convenience foods can be expensive. He won’t want a gourmet cookbook (that kind of food can be at least as expensive), just something with basic recipes that can be cooked without a lot of time or effort.

He should take a good hard look at features he has on his cell phone plan, phone service, et cetera. If he’s not regularly using most of his cell phone minutes, he should go with a cheaper plan with fewer minutes, for example.

Whatever he does, he should make sure his car insurance gets paid. I was in an accident several years ago that was caused by someone who let his policy lapse. His car had to be towed away (at a guess, it was totaled), and I had to report him to the DMV for driving without insurance, which IIRC means he lost his license for a year (that’s in CA- other states/countries will vary). He was in a world of financial hurt even if he wasn’t in debt before that.

17

One of my simple, easy to follow rules was: if it comes from Safeway, I can have it. Safeway stocks all kinds of foods and meals, from do-it-yourself gourmet meals cooked at home to “fill your freezer with Hungry Man Dinners.” Regardless of what you buy, it will be cheaper than eating out multiple times a day (well, unless you plan to live on caviar and lobster). Probably your best bet for a single guy would be somewhere in the middle of the road - a loaf of garlic bread, a jar of spaghetti sauce, some nice hamburger, some pasta, and you’ve got a tasty, cheap meal at home with minimal effort.

18

A lot of people have great luck with snowballing debt. Apply the most you can to the smallest debt, then when that is paid off, use that towards the next largest debt. Mathematically, it doesn’t work, but because it works EMOTIONALLY most people get their debt paid off faster.

But he needs to find extra money if he is only paying the minimums:

What options does he have on his phone service? Can he skip the landline and get just a cheap cell (or skip the cell and go to just a landline)? (We are saving $40 a month switching phone providers and dropping all the crap on our phone we don’t even want - or want but not $15 worth of want). Cable TV? Netflix? Broadband? Meals out? Happy hour on Thursdays? Starbucks? A painless thing to do is call around and switch things like car insurance to a cheaper provider. Grocery bills? Basically, to make progress quickly, he needs to “live poor.” It won’t be pleasant, but the more he can cut, the faster the debt will go down, and then he will have all that money going to debt to spend.

Next way to find extra money - earn it:

Can he work overtime? Get rid of old DVDs or music on eBay? Walk dogs on Saturday?

19

$20K in debt? Amateurs! After a big breakup and severe depression (making me lose >100 working days per year) for several years, I found myself $74K in consumer debt. Finally snapped out of it (the medications finally kicked in) a little over four years ago, and now I am the proud owner of only $7K in debt! By Thanksgiving, that’ll be down to zero.

Things that worked:
[ul][li]Focusing on something a friend said: “There’s a world of difference between someone who spends 99% of what they earn and someone who spends 101% of what they earn.”[/li][li]Snowball method: Lowest balance first (to get some positive feedback), then attacking the rest of the balances from highest interest to lowest interest. That last $7K is at 4%, so I officially stopped losing sleep over my debt about three months ago.[/li][li]When I smoked, I used to visualize wealthy tobacco barons living on the hills cackling with glee every time I lit up. That helped me stop. For debt, I just changed the tobacco barons into credit card executives, and that gave me an image to spite.[/li][/ul]
Best thing about it: I took possession of my debt and worked out of it without declaring BK.
Worst thing about it: Four years of no life whatsoever. Also, now I feel guilty every time I buy something that’s not a necessity.

20

First thing to do is cut up the credit cards. Have him do it, it’s symbolic. He can have one for emergencies, but it needs to have a low (maybe $500 or $1000) limit. And he needs to keep it in an hard-to-access part of his wallet.

Then, take advantage of balance transfers and get the balances in zero-interest accounts.

Then work out a plan to pay those balances off in a time/monthly payment ratio he can live with.