Escaping Credit Card Debt
by Gary Foreman
Not too long ago they had $30,000 in credit-card debts. This month they paid off the last remaining balance. But, how did they do it? Cara and Michael's story is an inspiration for anyone trying to get out of debt. Recently, Cara shared their experience.
We began by discussing how they started. "Stop spending. We just said, OK, no more. We won't buy anything if we can't pay for it in cash. We cut up all the credit cards. We have an American Express."
She went on to explain that they kept the American Express card knowing that the entire bill must be paid each month. Eliminating the credit cards was a big breakthrough. "We just stopped spending. If you don't have a credit card with you, you can't put it on credit."
Once they stopped adding to the debt level, the next step was reducing the amount that they already owed. Cara watched her mailbox for credit card offers with low introductory rates. When she found one, she'd switch to that card. When the intro period was over and the rate increased, she'd find another card. Cara began to be concerned that their credit report wouldn't look good because of all the switching. So she began to approach the credit card companies for a lower interest rate. "I would negotiate with the credit card people." She'd tell them, "I've got these other offers and I'd like to stay with your company. But I need the lower interest rate." Said Cara, "I've gotten some of them to extended the introductory rate."
Cara grew up in simple circumstances. Her father died when she was three, leaving Cara's mother to raise seven children alone. Although they struggled financially, all of the children attended some college. Cara has a master's degree in accounting.
When asked how she managed to accumulate so much debt, Cara thinks part of it was 'making up' for her childhood. "A lot of it had to do with going up poor. When I got out on my own and began making a decent living I just wanted to 'treat' myself. And I did! If I wanted something I got it."
When she met her husband, she had about $7,000 in debts and he had some, too. They moved into a $525-a-month apartment in Atlanta. "My car was paid off. He had an older car that was paid for. So we really didn't have any expenses. We did have our credit cards we had to pay."
Like many people, a big expense accelerated the growing debt. "His car died. So we wound up getting him a new car. That's where it started. And a month later I totaled my car. So I wound up getting another new car. We went from having no car payments to two payments. And both of them were leases. That wasn't a bright idea either, but the payments were cheaper and we wouldn't have been able to afford a payment on a purchase."
As young professionals they expected and got salary increases. But, Cara explains, "For each step in salary we also spent more."
"Then we decided to buy a house." They didn't have savings to use for a down payment. "We borrowed money from family. I even took a cash advance on a credit card. Of course, when you move into a new house there are all these things you needed that you didn't know you needed."
At the peak, Cara figures they had about $30,000 in credit card debt. She began to be concerned that they wouldn't have anything saved for retirement. After cutting up the cards, they began to examine other expenses. "I look at everything we're spending. That helps because you see what you've done.
"We do make good money, so that helped. We have an advantage that a lot of people don't have. Every penny that we've got in any kind of bonus, extra salary that we've made" went to debt reduction.
But Michael and Cara used more than increasing paychecks to get out of debt. They looked at their expenses and made some lifestyle changes. "We got rid of our cars. We now have two used cars. We took out a home equity loan to buy them. I've paid off one of the used cars and a good portion of the other car."
Even smaller purchases were questioned. Friday night pizzas became a homemade affair. Regular movies and manicures became a thing of the past. Does she miss the old days? "Not really. Especially not the eating out. We eat a lot healthier."
What advice would Cara pass on to others who are concerned with mounting debts? "Just don't buy what you want. If I really want something, I'm going to think about it for a long time. I'm going to research all the possibilities. Do I really need it? How much use am I going to get out of it? If there's something that I don't need, but really, really want, I'll still think about it."
The path to financial freedom has also been a learning experience for the couple. They've rediscovered the local shoe repair shop. Secondhand stores were found. "I wanted a pair of jeans. So I went to Goodwill and found a pair for $2." Cara sought ideas from other sources. She borrowed the Amy Dacyczyn Tightwad Gazette books from the library. "The library has become a great resource for me. We used to spend a lot of time in the bookstores, and a lot of money in them."
Cara's voice brightens as she describes how they got closer and closer to paying off the final card. It's taken about two years to accomplish their goal. The next step is to finish paying the home equity loan that was used to buy the second car. That's expected by the year;s end. Long range plans include a well-funded retirement account.
In the meantime, they're beginning to explore the luxury of being free from debts. Michael has taken a lower-paying job that he enjoys more. Cara thinks of spending more time helping disadvantaged children.
How would Cara summarize their experience for others? "The first thing is to stop spending. Don't put any more debt on the credit cards. If you want something you'll just have to do without for awhile. Every extra bit that you earn you put towards the credit cards. Reward yourself once in awhile but do it realistically and within your budget. Just look at where you can cut. That's what we did."
Our congratulations go out to Cara and Michael. And a big 'thank you' to them for sharing their story.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.
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