Credit & Money Management

How I Kicked the Credit-Card Debt Habit

Freedom from revolving debt took patience, a plan and a lot of hard work.

By Rachel L. Sheedy, Managing Editor, Kiplinger's Retirement Report

October 3, 2007

Credit-card debt can stockpile for all kinds of reasons. Mine seemed innocent enough -- after all, I wasn't buying Manolo Blahnik shoes on a journalist's salary à la Sex and the City. Shopping trips didn't help, but neither did years of traveling to visit far-flung friends, multiple bouts of moving expenses while job hopping from city to city, and a stop for more education.

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I also bought into the rhetoric that everyone has revolving credit debt. Why worry about having to pay now, when I could just pay later, right? It's not like we live in the Charles Dickens era of debtor's prisons.

In fact, in the eyes of my credit-card companies, I was a model cardholder. I had small balances sitting on multiple cards and always paid my minimum payments. Along the way, I did pay off some cards, and my credit score didn't suffer. But I never focused on completely erasing the debt.

Then came 2004, and expenses from another move and a costly round of unexpected repairs added to the balances I was already carrying. With my credit-card debt doubling to more than $9,000 on five cards, I realized that I had taken a serious turn in the wrong direction.

Time to Pay the Piper

Fast-forward to 2007, and my revolving credit debt has been wiped out since the beginning of the year. Kicking the credit-card debt habit wasn't easy. It required changes in mindset and behavior, a lot of patience and about three years. To stop the bleeding, I had to tighten the purse strings, work more, set some ground rules and keep focused on my end-goal.

Cold turkey was not for me. I allowed myself to use one rewards card for monthly expenses, as long as I paid it off in full each month. The rest of my cards got tucked away, never to see the light of day.

Next, I put my revolving debt onto two of the tucked-away cards using low interest-rate offers, so more of my payment would go to the debt instead of interest. Most of the debt went on a card that offered a fixed rate of 4% for the life of the balance, and the rest went on a card offering 3% for a limited period. Consolidating made my debt easier to track, too.

I figured I could squeeze at least $200 a month from my budget to put toward the debt. I hiked my income with extra work, and I reduced discretionary expenses. When I did spend "fun" money, I tried to be smart about it. I went out for coffee or drinks instead of dinner, and rented movies on DVD instead of going to the theater.

In time, my debt began to slowly decrease, though sticking to my plan wasn't always easy -- costs increased, or an unexpected expense popped up. But I adjusted my budget and kept with the plan. Progress, like interest on savings, compounded, and my credit-card debt got paid off long before I thought it would. I even paid off my car loan early.

If you need to dig yourself out of debt, keep these six tips in mind.

1) Face the music. Tally up how much you owe on each card and the interest rate you're paying for each. Then, figure out where your money goes every month, and how much you could shift to paying down debt. To make headway, try to lower your interest rates and aim for a monthly debt payment that's more than the minimum. The minimum for my larger balance was $140. So I put $150 toward it every month to start, and stuck with at least that amount even when the required minimum payment began to drop. Once your payoff plan is in action, monitor it. (See Tame Your Credit Card Debt for more help devising a plan.)

2) A savings cushion is critical. I had stopped saving for the short term, having long ago closed my savings account. So I opened a new one and put in money such as bonus checks, expense checks or birthday checks. I also started automatically depositing about 5% of my regular paycheck into savings. Result: My savings grew fairly quickly. Soon I had a cushion of about two months of my regular take-home pay, and I was able to occasionally put more money toward my debt, which accelerated the payoff. I also could cover emergency expenses that before would have racked up on a credit card.

3) Cut consumption. Learn how to be cheap. I ditched cable, for example, and started going to the library instead of the bookstore. To avoid temptation, I quit going to stores to browse, which usually resulted in buying. (Get more ideas of simple ways to cut back in 20 Small Ways to Save Big.) I didn't forgo all fun, but I reined in how much money I was willing to lay out. Sometimes, there can be peer pressure to spend -- keep your eye on the goal and stick to your plan.

4) Baby steps add up. Consider paying off smaller debts first, because that can boost your confidence that you can pay it all off. I knocked off the card with the smaller balance at 3% first. I decided to use some of my blossoming savings to pay off my car loan early; at 5%, that interest rate was higher than my credit-card rates, and the freed-up $200 a month gave my budget breathing room. Over time, the accumulated savings from two paid-off debts helped wipe out the last $1,800 of my revolving credit debt in one fell swoop. Learn more about how to prioritize your debt.

5) Look high and low for cash. Cutting expenses and paying off other debt frees up money. I had already consolidated my student loans, but those who haven't might loosen up cash that way. A big key to accelerating my debt payoff was the fact that I hiked my income. I cashed out some vacation time -- I wasn't going anywhere anyway -- and took on a lot of freelance and part-time work to grease my budget with an extra $200 to $400 a month. If you've been getting a tax refund, get more take-home pay by changing your withholding on your W-4. If you haven't gotten a raise in a while, think about asking for one or looking for a higher-paying job elsewhere.

6) Devise a backup plan. Setbacks can happen, and not all are under your control. I had stricter expense cuts waiting in the wings if my initial strategy failed. It didn't, though some months I came perilously close to having to take more drastic action. If you screw up a little bit, brush it off and soldier forward. When I slipped up and incurred late fees on the card with the smaller balance, I sucked it up, paid the fees and then switched that balance to a 0%-for-a-year offer before my interest rate jacked up from 3% to more than 20%.

Sheedy is an associate editor for Kiplinger's Retirement Report and a contributing editor for Kiplinger.com.

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