Digging Out From Debt

Suffering from the post-holiday credit-card blues? Then it’s time to break bad spending habits and start budgeting to pay off old debts while easing the impact of any new ones.

You don’t have to be a tightwad to prevent debt overload, says Mary Hunt, author of Debt-Proof Living. Most people can cut spending by up to 20 percent, adds Vicki Robin, co-author of Your Money or Your Life.

The average American family owes more than $8,000 on credit cards alone; the majority cannot afford to owe more than 20 percent of their take-home pay, aside from mortgage or rent payments, according to the National Foundation for Credit Counseling.

So how to dig out of debt and avoid the same situation next year? Consider adopting some of these suggestions:

Make a spending plan
Know how much you are earning and spending. Make a realistic budget. Before buying, ask yourself: Do I need it? How many hours will I have to work to pay for it?

Avoid cash advances
Don’t use the cash-advance feature of your credit cards to pay off bills. It will only get you in deeper credit trouble down the road. For now, at least, put your credit cards in a drawer. Make only necessary purchases, and make them with cash. Cash customers spend 30 percent less on shopping sprees than those who pay with credit.

Identify key situations
Identify situations in which you lack financial willpower, such as trips to the supermarket. Put any items not on your shopping list in the cart’s child-seat area. If you find a great bargain, take something off your list to accommodate the good deal.

If you can’t control your long-distance telephone calls, cancel the unrestricted service and use phone cards instead. Using a phone card is like using cash, so you tend to be more careful about your phone time.
Also, consider reducing the number of premium television channels or even going back to basic or “free” TV.

With natural gas and propane prices still surging, take a look at the thermostat. You don’t have to live in the dark to cut utility bills. Lower the thermostat a few degrees in the winter and raise it a few degrees in the summer.

Consider closing off part of the house, especially if the older children have gone off to college. Ditto for the rec room in the basement, if no one uses it anymore.

Practice “enoughness”
If you are in the habit of taking three vacation trips a year, skip one trip and see if you feel seriously deprived, suggests author Robin. Or, instead of buying the largest coffee each morning, cut back to the next smaller size and see if you are not just as satisfied.

But don’t give up the things you really love.

Think about the things in life you really want. Once you’ve identified the pleasures that are most important, you know where it’s safe to cut—and where it isn’t.

Check your credit
You may be working hard and spending wisely, but if your credit report is less than perfect, you may be unable to get reasonably priced insurance, a mortgage with a low interest rate, or even the job of your dreams.

About one in three credit reports contains a mistake, says the Public Interest Research Groups. The major ones: lenders say you missed a payment, when in fact you didn’t; lenders say you owe an amount that’s different from your records; credit-card accounts you thought were closed are still open, and there’s an open account that you don’t recognize, which could indicate identity theft.

THE TRUE COST OF CREDIT CARD FINANCING
If you charge $1,000 at an annual interest rate of 18 percent, which many cards still charge, and pay only the minimum amount due each month, it will take seven years and nine months to pay off the debt—and that’s if you don’t charge another item. Total finance charge: nearly $700, says the Bankcard Holders of America consumer group.

KEYWORD EXCLUSIVE

CONSUMER REPORTING AGENCIES
For contact information on the three major consumer reporting agencies for credit information, click here: consumer reporting agencies