Nov 23 2008
Paying down your credit card debt
Most people accrue credit card debt because they spend more than they earn. It’s literally that simple! And in order to find the money to pay down the debt, you first need to organise your finances so you spend less than you earn.
Like everyone, I’ve gone through periods where I’ve accrued credit card debt, and this is mainly down to what I would call “unconscious spending” on small items - buying a new top that’s on sale, a spontaneous trip to the restaurant, getting into the habit of putting everything on the card, instead of carrying cash. None of the items seem like a big deal at the time, but add up to a big debt over time. The other area where credit card debt is built up is over the big annual items that you should have planned and budgeted for, such as the annual car service, but have “forgotten”, so out comes the credit card.
The only way to shine a brutal light on your spending habits is to keep a spending diary. Be honest with yourself and record absolutely everything. You’ll spot patterns such as the habitual takeout, the wine bill, buying small items of makeup every week, and so on. We found to our horror that we had spent the equivalent of one of our credit card debts on takeout Rogan Josh over the year!
Once you have found where you are overspending, you need to cut back in that area. It’s harder than it sounds as habits are difficult to break. Tackle one bad habit at a time, and force yourself to stick at it. It usually takes three solid weeks to break a habit, so prepare yourself for the deprivation and disorientation that you will feel until the habit is broken.
You will also need to break the habit of using the card. Cut it up (or simply put it into a bag of water and freeze it in the freezer). Withdraw a budgeted amount of cash each week, and only spend the amount in your purse or wallet.
You also need to organise a budget for yourself. Allocate money towards rent/mortgage, the food bill, minimum debt repayments, utility bills, clothing and travel. Also work out what your annual expenses are, divide by twelve, and add to the monthly budget (organise for a direct transfer of this amount to a savings account set up for the purpose). Now add all the items up. If they come to more than your monthly income, then you need to somehow cut back.
Check if you can remortgage to lower your payment, or if you are renting, see if you can move to somewhere cheaper. Shop around with respect to your electricty, gas and phone suppliers and see if you can switch to somewhere cheaper. Stop buying clothes temporarily and make do with what you have.
Once you have your budget done and have got your spending below your income, the difference is what you have left to repay your credit card debts.
List all your credit cards with the amount outstanding, the interest rate and the minimum payments. You have already budgeted for the minimum payments. You are now going to work out how to use the surplus in your budget to repay the cards (it’s impossible to repay the debt if you simply stick to the minimum payments). Choose the card that has the highest interest rate and add your surplus to the minimum payment for that card. Then diligently make that payment till the card is paid off. Once it is paid off, reallocate the money to the next most expensive card.
What if despite all your efforts, you still can’t even find enough money to make the minimum payments? Contact each credit card company and ask if they can freeze the interest, and come to a voluntary repayment arrangement based on what you can afford to pay. Once you have this agreement in place, you must stick to it. If you renege you will find the company won’t give you another chance and will instead pursue you in the courts for their money. Never ignore letters from the credit card company, and if you are summoned to court, always turn up to put your case. Most judges will be fair and order you to pay something you can afford. But if you don’t turn up, the ruling by default will go to the lender. You will find baillifs at your house (or in the worst case scenario, they can get a ruling to repossess the house itself).
