Yes, Santa, it's time to pay off debt


January 09, 2000|By Eileen Ambrose | Eileen Ambrose,Personal Finance

WHILE MANY of us worried that a Y2K computer bug would wipe out our financial records, a few callers to Debt Counselors of America in Rockville were hoping just for that.

Imagine a computer glitch getting rid of mounds of debt racked up over the years. But fortunately, or unfortunately if you're one of those looking for a quick computer fix, 2000 rolled in without a computer mishap that would have restored consumers' debt to the level they carried in 1900.

So, if you want to get out of the red this year, you're going to have to do it the old-fashioned way through disciplined planning, budgeting and belt-tightening.

Now is the time of year that consumers start thinking about getting their financial house in order. Some are motivated by New Year's resolutions. Others are spurred into action by the arrival of credit-card bills from the holidays, said Linus Campbell, director of education for Consumer Credit Counseling Service of Maryland and Delaware.

"Come the end of January and beginning of February, we will see our appointment lines start to light up and go a bit crazy," Campbell predicted.

Debt Counselors of America, a nonprofit that helps people get rid of debt, estimates that half the population lives paycheck- to-paycheck. "It's everybody. It's doctors, lawyers, accountants," said Mike Kidwell, co-founder of Debt Counselors and co-author of the book, "Get Out of Debt: Smart Solutions to Your Money Problems."

So how can you make a dent in debt this year? Experts advise you to:

Remember that money you took out of the bank in case automated teller machines were knocked out of commission by the date change?

"We're urging people to put that money back in the bank so they have money to pay their bills," Kidwell said. Having that cash in hand only increases the chances of spending it on things other than outstanding bills, he said.

Track your expenses. Many people know the cost of major expenses, such as rent or the mortgage. But they don't pay attention to all the smaller or less frequent costs that occur and eat away at their finances, like videos, lattes, car insurance or magazine subscriptions.

Kidwell recommends keeping a record of expenses for three to six months to capture all the costs. Those who do track expenses find that they start cutting costs by 10 percent to 15 percent because they start thinking about purchases more carefully, he said.

Once you know where your money goes, you can develop a budget that can show you where expense can be cut.

Stop running up more bills. One of the best ways to do that is to close credit-card accounts. "You don't need more than just two cards," said Kidwell.

Many debt counselors advise paying off the credit card with the highest interest rate first because that's the card costing you the most. And you must pay more than the minimum monthly payment if you want to whittle away balances with any speed.

For example, the average person spent $841 on gifts this past holiday. If they paid for those gifts on a credit card with a 15 percent interest rate and made only minimum monthly payments, it would take them 13 years to erase the balance, according to Debt Counselors.

If you are having trouble paying creditors, tell them so. Creditors likely will agree to a more lenient repayment schedule if they know you are having a temporary setback but intend to repay your bills given time, an expert said.

"They don't want to hear you're filing for bankruptcy and they don't want to be ignored," said Dian Rowe, extension educator with the Maryland Cooperative Extension in Kent and Queen Anne's counties.

While paying off plastic or other bills, try to sock away some money in savings, Rowe said. If expenses crop up, you can pay for them out of savings rather than with credit cards, she said.

Consider consolidating your debt. For instance, transfer debt on high-interest-rate cards to a card with a low rate.

Some experts advise taking out a home-equity loan and using that money to pay off credit cards that charge a higher interest rate. But be careful. If you don't stop your spending behavior, you can easily run up hefty new debt and jeopardize your home, experts warned.

Some people are so deep in debt they need more extensive help. For them, there is counseling.

Debt Counselors, for instance, offers such assistance and asks for a $60 donation. Consumer Credit Counseling Service, a nonprofit funded by creditors, provides free help to consumers.

Last year, Consumer Credit's 13 offices in Maryland and Delaware handled 30,000 callers. The average client was 38 years old and carried $17,500 in unsecured debt, including credit cards and personal loans.

Consumer Credit's Campbell said his organization was able to help one-third of those with basic counseling and another third went through a debt-management program. The rest had financial problems too severe for the organization to handle.

In the debt management program, Consumer Credit will devise a budget for clients and work out a repayment plan with their creditors. Often creditors will reduce monthly payments or sometimes even waive interest fees.

"They realize the people coming into our agencies have the intention of paying the bill," Campbell said.

Experts said people enrolled in debt programs may take two to four years to get their account in the black again. So, if you vowed to get rid of debt this year, don't get discouraged if it's not easy or quick.

"People don't get into debt overnight," Rowe said. "It's impossible to think they will get out of debt overnight."

Do you have a personal finance issue of general interest that you would like to see addressed in this column? Contact Eileen Ambrose at 410-332-6984 or by e-mail at

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