Getting out of Debt Advice

[dadofandrew]

My wife and I use a credit card for everything, but, knock on wood, we pay it off at the end of the month. That's a perfect world, and we never pay for a hotel room, as we get points as well. But when in debt, it's easier to pay cash....otherwisw, your debt and current bills get combined.

[FVBrewerFan]

None of my business, but just make sure you and your wife are on the same page when it comes to money. That's the best financial advice I can give to anyone. You most likely (by what you've said so far) benefit by moving all your credit card debt to a home equity loan. These terms are very flexible, so be realistic about how long it will take, and get the loan for that time period. Now you're making one payment every month, plus it will probably be tax deductible for you.

 

Next, DON'T cancel the credit cards. One of the biggest factors in your credit score is amount of credit available to you vs how much you use. So keep them in drawer, and only use each one a couple times a year, and then pay it off immediately. Use only one consistently, and like others have said pay it off each month in full.

 

I have 6 credit cards, but only use one. Not only do I pay it off in full every month, I'll send in 2 or 3 payments each month (via automatic bill-pay from my credit union.) This way I don't get slammed with a big nut I have to pay at the end of the month. (Which is when my mortgage, utilities, insurance, etc. is due.) The other 5 cards I'll use a couple times a year for car license renewal, magazine subscription, etc. Then I pay the credit card company the same day.

 

Bottom line, I view my credit card like a checkbook. If I use it, I pay it off right away.

[JJHardy7]

Bottom line, I view my credit card like a checkbook. If I use it, I pay it off right away.

 

I'm the same way. I also make multiple payments a month. It really gives me a better idea of exactly what we're spending our money on. It is nice to also have some standard bills automated on it...like phone, cable, utilities, etc. I think that's good advice to view your credit card like a checkbook. I check mine a few times a week.

[olliegjw]

ollie, why would the loan suddenly be secured with my home exactly?

 

dadofandrew, thanks for your advice!

The bank needs collateral for loans, most often the home is that collateral.

[craigharmann]

STOP using credit cards

AMEN!!! Do you think our Grandparents and Great-Grandparents would use credit cards? NO WAY! Why? Because there is a value in saving for things. Problem is, our society is now a must have it now, pay for it later way of going about it. I fell into that trap my freshman year of college, and didn't get out of the cycle of using credit cards until about 2 years ago. Now, it's still a process of digging out of it all. Even if you pay off your credit card bill at the end of each month, what happens if you can't pay it off one month? Then you have to pay the interest. Better to pay cash either literally or with a debit card. I have cut up all my cards and closed ALL of my accounts, and once we get out from this hole in the next 2-3 years, we will only be buying things we can afford at the time, using our emergency fund when emergencies happen. Not a credit card.

[FVBrewerFan]

Yes, but in this world you need a credit card. My great= grand parents didn't have a telephone either..or a car. Times change. Besides, it's very difficult to build a really good credit score without using a credit card. You can do it, but it takes much longer to develop a credit history.

 

The key isn't using a credit card or not, it's whther you pay it off in full every month or not. You must, must, must make it a firm rule to pay it off in full every month, then it basically is the same thing as using cash.

[fondybrewfan]

Even if you are not going to use a credit card, it is still wise to hold on to one for credit purposes. I have like $20,000 in credit cards available to me. I don't use them at all but they help your credit score immensly so long as you balance isn't too high of a percentage of your available.

 

I needed to use credit cards a lot in college just to get by, it is a huge relief knowing I don't have any CC debt anymore, and I can thank the First Time Homebuyers Tax Credit for that.

 

Now if only I could rid our $35,000 in student loans.........

[craigharmann]

Yes, but in this world you need a credit card.

You do? Why? For a good credit score? Not if you pay for everything with cash either via a debit card, or with literal cash. And that's the point I've been trying to make. Society wants us to have a good credit score. Why do you need a credit score, if you're paying for things that you can afford! I know that's quite old-fashioned, but as Dave Ramsey says, "If you live like no one else, you will live like no one else."

[PeaveyFury]

Credit cards aren't all bad. My wife and I use ours for many things in order to get more bonus points.

 

A great point. I use my CC to pay off a lot of my utilities like Cell Phone/cable and things like gas, and get 3% cash back while paying the card off completely each month.

 

Society wants us to have a good credit score. Why do you need a credit score, if you're paying for things that you can afford!

 

You paid cash for all of your homes?

[Paul77]

Let me clarify my earlier point about not using credit cards. I'm not against using credit cards - responsibly. I just mean if you are in any kind of "troubling" debt, stop with the credit card use. Troubling being what ever that means to each persons individual situation. And since this thread was about getting out of debt as opposed to how to build credit history or improve your credit score, I think the point still stands.

 

My debt was very heavy at one point, mainly due to credit card abuse. And I'll be the first to admit I was very irresponsible with my money and credit. We finally cut up the cards in 2007, if for nothing else just the psychological jolt it gave us and we set out on getting out of debt.

 

That was two years ago. Now, everything we buy is cash out of pocket - otherwise we don't buy it. Since then we've been able to pay off two cars and we currently carry $0 in credit card debt. It does take a huge shift in attitude though. For a while, because we had to spend every cent we had on paying off bills and getting through that period, it was tough. But now, without the burden of all that debt, it's like I've doubled my salary.

 

Yes, it's very important to have a good credit score and to have a strong credit history, but it's pretty pointless to worry about those two things if you are suffocating under a debt so large you won't be able to get a home loan anyway. I guess like all things in life, you need to find a balance.

[craigharmann]

You paid cash for all of your homes?

Never owned a home yet. Still have to get out of the mountain of debt first before we save up for a down payment. But yes, we will take out a loan when we buy a house, then proceed to pay it off as fast as we can.

[dadofandrew]

I'm not sure why some are paying credit card bills before they are due, or the same day you buy something. That "float", the 45-60 day delay in paying a bill, can make you some serious interest over the course of all your bills all year. It only works if you have a zero balance, but it seems like most of them do.

[mtrebs]

...Why do you need a credit score, if you're paying for things that you can afford!...

I have a friend that when he was just starting his career as a computer programmer, he applied for a loan at a furniture store and they wouldn't give him the loan because he didn't have much of a credit history. It wasn't a big deal because he could pay for what he was buying with cash, but he was going to take the loan because is was 0%. I imagine you could run into similar struggles when purchasing a home, even if you had 20% down payment, if you didn't have a credit history.

 

That being said, you have to be responsible with your credit. Credit cards can be a very useful tool if you use them correctly and are very strict with paying them off in full and in time. If you aren't a responsible person you can get yourself in big trouble, so it's probably best to avoid using them.

[mtrebs]

I'm not sure why some are paying credit card bills before they are due, or the same day you buy something. That "float", the 45-60 day delay in paying a bill, can make you some serious interest over the course of all your bills all year. It only works if you have a zero balance, but it seems like most of them do.

It may be that they want to just pay it off like they were paying with cash, but get points from using the card. While I'm not disagreeing with you on how interest can work for you, I'd imagine you'd have to have some big credit card bills in order for you to make "serious interest" on the amount that they pay early. If this method works for you, that's great, but I prefer to pay off the debt that I owe ASAP so in case something happens I don't have to worry about where I'm going to come up with the money for these credit card bills. If the interest I'd get would be a lot I'd definately consider waiting to pay the bills off, but for me the peace of mind of having the debt paid off is worth the couple dollars I may earn in interest a month.

[PeaveyFury]

But yes, we will take out a loan when we buy a house, then proceed to pay it off as fast as we can.

 

And at that time, you'll have to acknowledge how you need a good credit score even when you're buying something you can afford. And as mtrebs mentioned, applications for a lot of things require you to have a credit history. Heck, they seriously checked my credit score when I signed up for my last cell phone plan.

[dadofandrew]

We put about $1500 a month on the card, groceries, utilities, darn near everything except the mortgage. $18K a year, at 1% is $180, but since it's only a month of float, I would assume it's 1/12th, or $15.

 

I sure would have thought it was more than that.http://forum.brewerfan.net/images/smilies/smile.gif

[homer]

They use credit scores to help determine car insurance rates in some places.

[JJHardy7]

AMEN!!! Do you think our Grandparents and Great-Grandparents would use credit cards? NO WAY! Why? Because there is a value in saving for things. Problem is, our society is now a must have it now, pay for it later way of going about it. I fell into that trap my freshman year of college, and didn't get out of the cycle of using credit cards until about 2 years ago. Now, it's still a process of digging out of it all. Even if you pay off your credit card bill at the end of each month, what happens if you can't pay it off one month? Then you have to pay the interest. Better to pay cash either literally or with a debit card. I have cut up all my cards and closed ALL of my accounts, and once we get out from this hole in the next 2-3 years, we will only be buying things we can afford at the time, using our emergency fund when emergencies happen. Not a credit card.

Again, credit cards aren't the world's worst thing and I don't get the reference with grandparents. Some people just think it's cash...some don't. I use a credit card for a ton of things and I've never ran into any problem. I treat it like cash. I don't go and buy a fancy electronic or something else just because I can. It's on an individual basis and I hope people understand that. If you've ran into bad luck or have some debt issues, than a guy like Dave Ramsey works for those people. I know people who work with him and he offers a lot of classes down here (never been to one). A lot of his business is common sense, but he also works with athletes, celebs, etc. on much more complicated matters. To me, the 'average joe' stuff is common sense, but individuals run into different problems which I understand.

dadofandrew - I check mine and make a few payments to ensure that we're not using our credit card in a way that would shock us later. It's typically the same things, but to be honest I'm not really to worried about the floating interest. The amounts usually aren't significant anyways compared to my checking/savings. I invest my money in other activities compared to the interest I could receive in a checking/savings account. We have a few different cards for different bonus points. Sometimes we only get 1%, but with some cards we get 5%. I know it's not a lot of money in terms of points, but if you're buying it anyways I'll take the points. I know some check cards are now offering rewards, but the one I have from my bank have some decent restrictions on them (payments must be signature based, certain websites, etc).

I know it's different for each individual, but some can use credit cards like a debit card and never have a problem with it. And I do understand emergencies happen. I guess I'm not really including those in my discussion. My point is you can't treat a credit card like it's cash, but if it's an item you need anyways I'll always take the bonus points.

[craigharmann]

I don't get the reference with grandparents.

The point with grandparents is that in the past, it was acceptable and considered normal to save up to pay for things. To live within your means. Today, you're considered normal if you have 2-3 (or more) credit cards, a loan for a car, and a few other things. You can justify it by saying it's for a good credit rating, but if you don't use credit, then why do you need a good rating? The whole thing that I (and I think many others) have come to is you have to live within your means, and save up for what you can afford. It's very easy to go buy the $1000 flat screen TV because it's the newest, biggest and best, and just throw it on the card. But it means something more, in my estimation, if you save up for it and pay cash for it. I am kicking myself over and over to continue to pay monthly for a computer I got rid of 5 years ago, meals and gas from probably 10 years ago, etc. etc. I don't want that temptation around me.

[JJHardy7]

What if you put that $1k television on your credit card and pay it off on time? That's my point. Most people aren't lucky enough to buy a house without a mortgage....that's where your credit rating comes in. My entire point is you can use a credit card and live within your means. It's not like using a credit card means you're living way outside your means...far from it in some instances.

 

There are many opportunities out there for people that have good credit. From a finance view, there are many auto loans right now with 0% financing. It would be silly to pay for the car up front give time, value, money, etc. Again, it's an individual thing and not a grand sweeping generalization.

 

EDIT - I don't think I'm disagreeing with you. I agree 100% one has to live within one's means...I just don't see credit cards as the reason it happens. Credit cards enable it to happen, but they're not the cause of it if that makes sense.

[PeaveyFury]

You can justify it by saying it's for a good credit rating, but if you don't use credit, then why do you need a good rating?

 

And again, 99.9% of the people in this country can't pay cash for their home, so almost everyone needs a good credit rating.

 

And JJHardy is 100% correct- there are great opportunities out there for those that have great credit. I bought a living room set last spring at 0% interest for a year. I could write a check today to pay the whole thing off, but why would I do that when my checking account makes 3.5% APR? It's like free money and would be silly to pay for it up front in that situation.

[davego]

There is some theory out there that people will spend something like 33% more money when they use plastic over the real thing.

 

Dave Ramsey provides pretty solid stuff.

[Invader3K]

I basically put all my day to day purchases (gas, food, etc) on my credit card, and pay off the whole balance every month. Been doing that for years, and as a consequence I have a very good credit rating. So I would disagree that using credit cards is bad. I guess I'm a pretty disciplined spender though...I never buy anything if I know I wouldn't have enough in my bank account to cover it. I hate writing checks, too.

[TwinsBrewersWorldSeries]

Great Thread http://forum.brewerfan.net/images/smilies/smile.gif I can relate to many of the things being said. I fell into the trap during graduate school, at at the time of graduation was in about $80k in debt when considering student loans, credit cards, and a personal line of credit from the bank. My parents got me a credit card for emergencies when I was 16, and i had been slowly building up credit the past 11 years before falling into that trap at age 23. Fast forward 2 1/2 years, and i had 2 years making roughly $50k, and i made my payments but didn't make a ton of progress on my debt load.

 

However, with the new year came a boost of $20k in salary, and i've been making great strides since then. I know most people have a temptation to increase their standard of living when they get a nice raise or a better job, but essentially i've been able to put that $20k in salary ($12k net or about $1,000 a month), directly into my debt payments.

 

at $70k/year, my salary comes out to about $4,000/month... i've tried to arrange it into four groups

1) Living Expenses (including car payment) are about $1,800/month

2) Student Loans/Credit Cards- Minimum Payments are about $650/month with $300 going to interest and $350 to principal

3) Misc/Emergency Expenses - trying to stay at/below $250 month

4) $300/month 401k/403b contribution- i get a pension from work, but i'm trying to build up a second source of retirement income since Soc Sec likely will be gone before i retire

5) $1,000/month leftover- putting directly into extra principal payment.

 

30 months of the normal payment helped me knock my debt down about $10,500 (slow slow progress), but now that i've essentially increased my principal payment from $350/mo to $1350/month, i'm making serious progress. Within 24 months, i should be able to eliminate all of my debt (car paid off as well) except my one consolidated school loan which is at a very good interest rate. Its not easy passing up things i "want" now, but basically i view it as making $1650/student loan payments. When i reach my goal, that number will fall to $400/month, and i'll have roughly $1250/month left uncommitted.

 

Basically when i get to that point, my goal is the split the extra money into thirds... 1/3 ($400/mo) to an emergency reserve to hedge against illness/unemployment/unexpected purchases, 1/3 into increasing my retirement savings (to $700/mo), and 1/3 to enjoy life a little more. $400/mo isn't a ton of money, but that pays for one very nice trip each year, or a couple of smaller trips/purchases.

 

Luckily i have great parents, a great education, a job i enjoy, and the sense that paying stuff off in my late 20s will be easier than in my 30s with a wife, house, kids, & dog.

 

Kudos to everyone else who has taken control of their situation. Keeping track of expenses on an excel spreadsheet might be nerdy, but it feels darn good to make progress.

[FVBrewerFan]

In addition to all the benefits we have already mentioned, here's another reason to have a credit card. Try reserving a hotel room in advance, rental car, airline tickets, etc. without one. There nay be a way in some cases, but it must be incredibly difficult.

 

And in response to Dad's question "Why would I pay off my credit card before payment is due?" The interest on the float for a couple weeks is literally almost nothing these days. If I owe $1,000 in two weeks, and pay it off today instead that's about 40-50 cents of interest. I much rather pay it off to avoid the false sense that I have that $1,000 sitting in my checking account. I bought something, so I will pay it off almsot immediately.

 

I will say, even though I have been the biggest defender of credit cards, mis-use of credit is a huge problem in this country- and not just credit cards. I know too many people with homes mortgaged to the hilt and driving cars they can't afford.