Steps to Get Yourself out of Credit Card Debt

SAN MATEO, Calif., Aug. 9, 2006 – Imagine this hypothetical tale of financial folly: A woman gets to the checkout at the grocery store and realizes her checking account doesn’t have enough money to cover that month’s bill. She then pulls out her charge card and tells herself she’ll pay it off next month.

But not only is she unable to pay off the groceries, an unexpected medical issue leads her to charge another month’s groceries, plus the emergency room fee not covered by her insurance.

With higher rent payments and utility costs climbing, her “standard of living” raise does not cover costs of living. The credit card finance charges begin to mount. The next month, she scrapes together her payment – but it’s late, and her credit card company raises her interest rates to the delinquent limit of more than 25 percent annually. Her minimum payment goes up again, and after a car repair, she’s accumulated a balance of several thousand dollars – and can’t pay more than the minimum payment.

The real problem, according to Bills.com president Brad Stroh, is that this woman is not unlike many American consumers. Over her head in debt, she feels helpless and trapped – and her debt piled up without her making a conscious decision about it.

In today’s environment, it is easier than ever to fall behind temporarily. The American Bankers Association reported that during the first quarter of this year, the number of late payments on credit cards rose by 13 percent – an increase attributed to rising gasoline costs and higher interest rates. At the same time, the U.S. personal savings rate has been negative for five consecutive quarters, according to the U.S. Department of Commerce Bureau of Economic Analysis. This means Americans are dipping into their savings to make ends meet, rather than accumulating savings.

For those fighting an uphill financial battle, the following six steps will minimize the damage of mounting debt, says Stroh.

• Stop charging. With credit cards often serving as “emergency funds,” be sure you aren’t doing additional damage to your financial well-being by charging things you don’t need.
• Always pay on time. Even if you only can make minimum payments, send your payment on time. Late payments risk higher interest rates (penalty rates can reach as high as 31 percent ), which mean still higher minimums. Some cards can even raise your interest rate if you pay late on another creditor’s account. Plus, late payments mean late fees, adding still more to the mountain of debt.
• Pay more than the minimum. Pledge to pay more than the minimum payment whenever you can. Adding even $10 or $20 to your payment – or rounding payments up to the next $10 or $100 increment – will knock out debt faster without adding much to your fiscal pain.
• Eliminate the highest-interest-rate debt first. Pay the most on your highest-rate debt. When that’s paid off, move on to your next-highest-rate debt. Save tax-deductible debt, such as student loans or mortgages, for last.
• Negotiate your rate. If you have a history of always paying on time and simply have accumulated more debt than usual, you might be your creditor’s ideal customer. If your rate is above the national average of 14.67 percent , call your card’s customer service line and ask if they can give you a better rate.
• Seek help. You might not realize how many sources of help you have to get out of debt, especially if the situation was caused by a short-term problem such as a medical emergency. For instance, you could borrow from relatives, borrow against life insurance or retirement funds, or consolidate old debt onto a no-interest credit card. For more ideas, visit Bills.com's debt consolidation article.

“For those who are over their heads in debt, taking action quickly is critical,” says Stroh, “before it’s too late to prevent any temporary hardships from becoming permanent financial crises.”

Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products and services. Since 2002, Bills.com’s partner company, Freedom Financial Network, has provided consumer debt resolution services, serving more than 7,500 customers nationwide and managing more than $250 million in consumer debt. The company’s co-founders and CEOs, Andrew Housser and Brad Stroh, were recently named Northern California finalists in Ernst & Young’s 2006 Entrepreneur of the Year Awards.