Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com.
Dear To Her Credit,
I am paying the minimum balance on my credit card bills each month, which is not knocking anything off. If I stop paying some of my credit card bills and concentrate on paying off a credit card one by one, I can knock one credit card off in three months.
I understand my credit will take a dive, but I feel this is my only solution besides bankruptcy. What can happen with my credit and is this a good idea? -- Jessica
Dear Jessica,
Thanks to disclosure rules that went into effect in 2010, we can all look at our monthly credit card statements and see -- in large type -- just how long it will take to pay off our credit cards if we pay the minimum amount every month. That's supposed to make us think twice before we pay only the minimum or before we buy more than we could pay for immediately in the first place. More information should make us wiser, better consumers, right?
Unfortunately, more information can also cause us to become discouraged. Constantly being reminded of how long it will take to pay off your debt is like stepping on the scales too often when you're trying to lose weight. It's hard to see any progress, and we start to look for shortcuts.
In your situation, letting some cards slide while you concentrate on paying off one at a time seems like a shortcut. It's not going to improve your situation, however. In fact, it will make things much, much worse.
Let's say, for example, you have six credit cards, each with a $5,000 balance. You're paying 15 percent interest, about the national average, on all six cards. Your minimum payments, if your bank calculates them as 1 percent of the balance plus interest, should be about $112.50 on each card, or $675 total.
If you take the total amount you're paying in minimum payments and concentrate it on one card -- congratulations! In eight months, the first card is paid off.
Meanwhile, your other card balances are growing. Not only are you still paying 15 percent interest, but you're getting hit with late payment fees. The next month, your interest is calculated on your new balance including those late fees, and so on it goes. You'll soon find out that there are worse things than credit card balances that won't go down -- such as credit card balances that are doubling and tripling behind your back while your credit score is plummeting.
You say that your only other option is bankruptcy. Bankruptcy can sometimes be the best choice when people have insurmountable debt they have no way to pay off. If you are currently making minimum payments, even with some stress, you should continue to do so. If you have an average or better income and you file for bankruptcy, you will probably have to file a Chapter 13 bankruptcy and pay your debts in a court-ordered repayment plan. By the time you pay legal and court costs and surrender much of your control over your finances to the courts, it's hard to see how that helps in most cases.
That takes us back to the three basic steps of taking control of your finances:
Find out where you stand. Make a list of all your debts, including interest rates and minimum payments. You also need to make a budget so you know how much money is coming in and where it goes.
Increase your income. Get a side job, do some moonlighting, sell something or find a way to make one of your hobbies pay off. See if you can get people you loaned money to in the past to pay up. And by all means, if you always get an income tax refund, file a new Form W-4 with your employer to reduce your income tax withholding amount.
Decrease your expenses. Looking at the budget you made in Step 1, find ways to cut back. If you can pay off your credit cards in less than a year just by cutting out fast-food lunches and calling a moratorium on new clothes and electronics, that's great. I've had readers take more drastic steps, such as moving in with their parents -- kids and all -- and renting out their house to save money. You decide what you can give up to get out from a crushing load of debt.
Sally Herigstad answers questions about credit every week for CreditCards.com. Herigstad is a certified public accountant, author and speaker. She also writes regularly for MSN Money, Interest.com, Bankrate.com and RedPlum.com, and has been a guest on Martha Stewart radio and other programs. You can read more about personal finance and download free budgeting worksheets at her website: www.sallyherigstad.com
To Her Credit answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to Sally.
Published: July 1, 2011
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