Credit & Money Management
Live Debt-Free
How five people got on top of their debts, and how you can, too.
By Kimberly Lankford, Contributing Editor
From Kiplinger's Personal Finance magazine, November 2007
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To hear the media tell it, Americans are basket cases when it comes to borrowing. The average credit-card balance per person is nearly $3,900. College grads who leave school with student loans typically owe more than $19,000. Home-foreclosure rates are on the rise.
The truth is, most Americans manage their credit just fine. And for those who are sinking in red ink, there are plenty of life preservers. Learn how five people got on top of their debt -- and how they plan to stay there.
PROBLEM: Your credit-card balances are out of control
Cindy Campbell got hooked on credit cards in college, and within two years she owed $7,000. By the time she graduated, she was missing payments, paying over-limit charges and being hit with punitive interest rates.
In 1999, Campbell, who lives in Upper Marlboro, Md., signed up for a debt-management program. She paid a lump sum to a credit-counseling agency, which distributed the money to six credit-card companies. At the same time, she cut her spending drastically. "When I was paying off my debt, I hardly ever went out," says Campbell, now 27. "But it was worth it. I started to realize how good it feels to pay something off."
Good counseling agencies will review your finances and set up a budget free of charge. If appropriate, the agency will enroll you in a debt-management program, like Campbell's, which can lower your interest rates and wipe out penalties. You shouldn't pay more than $50 to set up such a program, and then no more than 5% to 7% of your monthly payment as an ongoing fee, says Todd Mark, of the Consumer Credit Counseling Service of Greater Atlanta.
Credit-counseling agencies are funded by credit-card companies, so they benefit if you enroll. But don't do it if you can't afford to keep up the payments. "We won't accept people for these programs unless they can pay off their bills in 60 months," says Mark (to see how counseling programs affect your credit score, see Ask Kim).
Campbell was free of debt, including a car loan, in three years, and she has never looked back. When a promotion doubled her salary, she began saving for a home down payment and took steps to improve her credit score. She bought a house in 2005, at age 25, and qualified for a 6% mortgage.
When she ran up a credit-card balance paying for renovations to the house, she called her two credit-card issuers to see which had the better balance-transfer offer and found one for 5.99%. Recently, she again called her card issuer, told the service representative that she was a longtime customer who pays her bill faithfully, and managed to get a rate of 7.99%. "Working to get out of debt takes serious discipline," says Campbell. "But it gives you more freedom."
WHAT TO DO: Erasing credit-card debt
Find extra money to put toward your bills. Cut back on spending, take an extra job and devote gifts or bonuses to paying off high-interest cards.
Call your card issuer and ask for a lower rate, advises Scott Bilker, of DebtSmart.com. Transfer your balance to a lower-rate card, but know the rules: Low transfer rates usually don't apply to new purchases.
Seek help from your lenders if you're struggling to pay your bills. Banks generally waive over-limit fees and late penalties the first time you're delinquent, says Bilker. Ask to have your payment date moved to a more convenient time of the month.
Contact a credit-counseling agency before you miss a payment. Find a reputable agency through the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies .
