Welcome to our week-long series on crushing your credit card debt. In this first of five articles, we look at the most important part of tackling credit card debt–stop going into more debt
Without a doubt, the hardest part of getting out of credit card debt is avoiding new debt.
Our society has grown so accustomed to using credit cards that we use them without even thinking about it. The charges pile up each month to the point where we can’t afford to pay off our cards in full. As our debt rises, we become even more dependent on credit cards just to get to the next paycheck.
To break this cycle, we’ll have change many of our behaviors, attitudes and expectations. And the first step is to understand how we got into credit card debt in the first place. The changes will be significant, so let’s get started.
How Did We Get Here?
Not everyone sinks into credit card debt the same way. For example, some used cards to pay for medical bills, while others used them to take a cruise. Some used plastic to get by after a job loss, while others went into debt eating out and buying jewelry. There’s a big difference.
The point of looking at your history with credit cards is not to beat yourself up or to blame others. The point of looking back is so we can make the best plan moving forward. If you can be objective about how you spend and where your areas of weakness are, you can implement focused changes to reverse the damage. Here are some common examples:
- Big Purchases: Some people do a great job controlling day-to-day spending, only to succumb to big purchases they can’t afford. Here the key is going to be creating a savings plan for big purchases and waiting until you have the money to pay for them.
- Everyday Purchases: For some, credit card debt is a result of spending a little bit more each month then they make. It’s no one type of expense; it’s a little bit of everything. If that describes your situation, better budgeting is going to be critical to getting control of your debt
- Medical Expenses: Health care costs are the number one cause of personal bankruptcies. Without health insurance, an illness can plunge anybody into substantial credit card debt both because of medical bills and because of lost employment. Here the focus will be securing health insurance, employment if that’s an issue, and then dealing with the debt
- Emergencies: As a final example, some do well controlling spending and debt, but get sidelined with periodic emergencies. The key under these circumstances will be to build a better emergency fund.
There’s no way to cover every possible set of circumstances that push people into credit card debt. The key is to objectively evaluate how you got into credit card debt in the first place. Understanding how you got to where you are will help you figure out what you need to do to get out of debt.
Below will cover some ideas to help you break the plastic habit. But it keep in mind that not all of these ideas will apply to everybody. That’s why it’s so important to understand what got you into debt.
Cut up Your Cards
Are you all in? If the debt you have accumulated is a result of frequent dinners out, clothes shopping, lovely lattes and other impulse purchases, cut up your cards. If you can’t swipe it, you can’t buy it. Cutting your cards is an act of determination and commitment much like ridding your cupboards of junk food when you are serious about losing weight. You do that because if they are within reach, you will eat them. When you eat that piece of cake or bag of chips you don’t gain two pounds right away, but it will definitely undermine your plan.
When you swipe your card, there is no immediate negative consequence, either. Cutting the cards will end the impulse purchasing. I recommend cutting the cards rather than cancelling the accounts. Cancelling your accounts can have a negative impact on your credit.
If you can’t bring yourself to cut up your cards, there are other options. If you find yourself using plastic to buy lunch at work everyday, don’t take your credit cards to work. In fact, you can leave your cards home all the time. Some go as far as giving their cards to a friend or relative you trust. Whatever it takes.
Build an Emergency Fund
Your debt may be the result of unexpected or ongoing medical expenses. Unplanned and unexpected repairs can also be devastating to your finances. Rather than relying on credit cards for unexpected expenses, build an emergency fund. This is essential regardless of your financial picture.
For those deep in credit card debit, I believe you should save an amount equal to one month of expenses before applying extra money to your debt. While there is no guarantee this amount of money will cover all emergencies, it should cover the most common types of emergencies like care repairs and minor home maintenance.
For more details, check out our Guide to Building an Emergency Fund.
Start Tracking Expenses
Sorry to keep comparing weight loss plans to your finances, but the similarities are so obvious. Both can be signs of impulsive or compulsive behavior and both require a great deal of discipline to reverse the mentality. That being said, the most successful weight loss programs incorporate a food log.
Visual awareness has a very positive impact on altering habits. There are great ways to track your expenses to see where your money is going. You can set up a Microsoft Excel spreadsheet and enter your income along with each and every expense. Don’t forget to put in the expenses that may not show up every month such as auto insurance, vacations, and gifts. Infrequent bills need to be broken down to a monthly amount so they don’t take you by surprise. Save your receipts and enter the info on a regular basis.
Another option is to use one of the great online tools. My personal favorite budgeting tool is You Need a Budget. While it’s not free, it is by far the best budgeting tool available today. You can give YNAB a try with its 34-day free trial.
In the next article in our series, we’ll look at how to Reduce Your Credit Card Interest Rates.
Published or updated January 24, 2012.