Updated: April 20, 2010
Recently, I received an email from a reader who is really set on getting out of her credit card debts.
I replied back with quite a lengthy response and thought I would share with you my advise to her.
I hope that through this, I would be able to help others who are likewise having a difficult time getting out of credit card debt.
Let’s now read a portion of her letter that she sent me.
Please, I need help…
I want to get out of my credit card debt. I really want to settle my debts but my income is just enough to cover my monthly expenses…
And almost always, at the end of the month, I will have nothing left to pay for my credit card bills. Moreover, collection agencies are now starting to harass me on the phone…
What should I do?
So what should she do? Below is what I told her.
First of all, stop using your credit cards. You don’t want to add more credit to it.
Second, know your monthly net income. This is important, you really have to know how much money you are exactly “bringing home”.
After that, list down all your necessary monthly expenses. I’d like to put emphasis on the word NECESSARY, which means only consider the things that you really need to just survive.
By this time, you’ll hopefully realize and see that if you can manage to just spend on what you need, then you can have some extra money in the end.
In my belief, as long as you’re earning above minimum wage, then there’s always a way to live within your means. A belief that’s reinforced by the handful of people I know who are just earning minimum and yet, still able to have a manageable life.
Furthermore, always challenge yourself and re-examine the things which you think are necessary.
A mobile phone? It’s a luxury and you don’t need one – really. If you need it for work, then tell your boss to issue you a company subscription.
A television? Yes, I think that’s a luxury. There are cheaper forms of entertainment and if you want to know what’s happening around you, then just read the daily newspaper in your office.
Hopefully by now, you have been able to redesign your spending and produce a surplus from your income by the end of the month. At this point, it’s now time to take care of your credit card debt.
First, calculate how much is the total monthly minimum payment required for all your credit cards. If you’re fortunate, this would be less than or equal to the monthly savings you’ll have in your budget.
The good news is this is the only thing you need to do right now – pay the minimum. This will hopefully stop the calls and give you some “breathing space” to think and plan.
Your next step now is to create your savings account. Yes, you should try to save money even if you have debts.
Read here why: Should I Save Money If I Have Debts?
The formula to remember is this:
INCOME less EXPENSES less MINIMUM CC PAYMENTS equals SAVINGS
Again, budget your monthly income so you can live within your means and still have extra money to pay the minimum on your credit cards and have a little something left as savings.
Okay, now that’s taken cared of. Here’s what you do to finally pay off the rest of your credit card debts:
- Find extra income. Start a sideline business, get into freelancing, perhaps find a second job.
- Liquidate assets. Yes, sell your things. Look around you and sell your stuff to your friends or in online auction sites.
- Call the bank negotiate for a payment scheme. If you’re not getting any results from the phone, personally go to the bank’s credit card department and present your case.
- Borrow money from your family or your super super super close friends. Don’t be embarrassed, own up to your mistakes, ask for understanding. Tell them you’ll pay when you can – never promise a date. Be honest and say that you don’t know when you can pay them. Respect their decision if they don’t want to lend you money.
Now, whatever extra money you get, it all goes to the payment of your credit card debts (which also includes your Christmas bonus and 13th month pay – yes, that all goes there).
Also, once your savings is high enough to cover for probable financial emergencies, you can then choose to funnel it to your credit card debt payments.
Try to pay first the credit card with the least amount of debt. Then work your way up to the other credit cards. The “small victories” will boost your confidence and motivate you. This is actually called the debt-snowball strategy (and will be a topic of another post of mine in the future).
Lastly, when all the credit card debt is gone, it’s time to pay your family or friends whom you borrowed money from.
The real key here is to stick to your budget. Be focused and have the discipline. Paying your credit card debt can take a couple of years or more. So you really need to be patient.
For what it’s worth, you will not go to jail if you don’t pay your credit card debt. Nobody has ever gone to jail for that. Don’t believe the calls and letters from lawyers and the police. They are just collection agencies pretending.
However, it is inconvenient to really get these calls and letters. So my suggestion is to just pay the minimum so you can get them off your back – then find a way to earn some extra income to pay the rest.
Some people have actually chosen to ignore their credit card debt and not pay a single centavo. That’s also an option if you want. But that is NOT what I recommend.
Do you want to know why? Read what happens when you don’t pay your credit card debts.
Lastly, the plan I suggested above is based on many assumptions and I believe that every person has their own best solution.
Talk to a friend who is good with money and ask him or her to help you sort out your finances. Better if you can consult a registered financial planner for they are trained and licensed to really help people like you.
And that’s our Reader Mail for today. I hope you were able to learn something on how to effectively get out of credit card debt.
Finally, I would like to take this opportunity to invite you to please become a member of the Ready To Be Rich community by subscribing to my blog. Thank you!