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Resolution #9: Credit Card Debt Be Gone

By June Kim

COME ON, ADMIT it: You've overspent this holiday season — the presents, the travel, the food, the phone bill. According to, an online credit-counseling service, the average shopper will spend $1,220 before it's all said and done.

And far too much of that holiday spending is being slapped onto plastic. As many as one-third of all credit-card users are already worried about paying their holiday bills, reports the Consumer Federation of America. In fact, if you're one of the 58% of all credit-card holders who carry a balance, you may still be paying off last year's gifts. Do you even remember what you bought?

No wonder so many readers are vowing to take charge of their credit cards in 2001. Says one reader: "My husband has three cards all with high balances and it seems to be getting worse by the minute." Her resolution? Pay off their credit-card debt "and get out of this mess!"

What's the first step? Well, some subscribe to the radical approach — various flavors of Cold Turkey. Put your cards in a safety deposit box or have trusted relative hang onto them, suggests Gerri Detweiler, author of the Ultimate Credit Handbook. Other credit counselors suggest storing your credit cards in a block of ice in your freezer. In the time it takes for that ice to melt, the reasoning goes, your spending urge will have probably cooled.

SmartMoney reader Dennis Kunselman has even gone so far as to swear off plastic altogether. "I will not use a credit card for the entire year. As a matter of fact, I have already destroyed them," he writes.

But if you're like most of us, you've got something a little less drastic in mind. So the first thing to do is figure out how bad the damage really is. If you've been late on payments, it would behoove you to get a copy of your credit report — the one your banker will look at any time you apply for credit. You can order a copy from one of the three credit bureaus: Experian, Equifax and Trans Union. Prices vary depending on where you live, but typically run about $8.50. If you've had a credit-card application recently rejected, you can get a copy of your report free of charge.

Next step: Figure out where your money is going. One way is buy a copy of Quicken and start entering in all your receipts. A simpler method is to visit the Cash Flow Worksheet, which resides on our sister site, SmartMoney University. It's a simple exercise, really, but it will help you see what budget items you're spending the most on. You'll probably be surprised.

After that, there's no way around it — you have to make some tough choices. If you want to pay down your debt, you've got to create a hard-and-fast plan to cut back your spending, targeting some of the superfluous items you identified in the Cash Flow Worksheet. This isn't easy, but you don't have to turn into an ascetic, either. Set some goals and put it in writing. That will help you stick to it, advises Detweiler.

Now, if you're paying a high interest rate on several of your cards (anything above 17% is considered high), you should also consider reducing your exposure. Start by calling your current credit-card providers to see if they'll lower their rates. You'll be surprised how often that works. If it doesn't, consider rolling over your balances to a card with a lower rate. If your credit report is bad, getting a new card may be troublesome. But given the ravenous appetite of the card companies these days, it's worth a try. Our "Should I Consolidate My Debt?" worksheet should help.

Beware those who say that if you have a 401k plan at work, a quick way to lower your balance is to borrow from it to pay off your debt. We rarely recommend this strategy. Generally speaking, we think that paying down your credit cards shouldn't come at the expense of screwing up your retirement account.

Finally, if you feel like the debt is spiraling out of control, consider a credit counseling service, like those offered by the National Foundation for Consumer Credit. Our article "Help! I'm Drowning in Debt" will tell you how to get started.

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