Steve Soliz picked up his first credit card when he was a freshman in college. He applied just outside the campus bookstore. Then just 17 years old, Soliz had never had much tutoring from his parents or teachers about how to use a credit card responsibly. He knew the basics. As for the rest, he would learn it the hard way.
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At first, Soliz used the credit card for the necessities, like paying for gas. But then, gradually, he began using plastic for the stuff he didn't need. Like a lot of young students, he wanted to keep up with his buddies, so he started charging clothes and electronics.
That habit--relying on credit rather than cash--continued after Soliz graduated in 1998. He got married and had children, first a daughter and then two more--twins. More responsibilities meant more expenses. Soliz found himself now putting more and more on that little piece of plastic. He was using the credit card to pay for groceries and even day care for the kids.
Tips To Avoid Drowning In Debt
Debt began to pile up. He thought he could stay one step ahead of the game by signing up for more credit cards, trying to use one to pay for another. Soon, he had 11 cards and $40,000 in credit card debt, which he couldn't afford. He was earning $44,000 a year.
A divorce from his wife added to the debt burden. As part of the divorce settlement, Soliz agreed to take on the debt both shared as a couple: $15,000. The tipping point came when he wrote a check for $1,200 to pay a credit card bill. It bounced.
"I knew I was in trouble," Soliz says. "I decided it was time to get help."
The average amount of credit card debt per U.S. household was $9,840 in 2007, up 25% since 2000, reports CardTrak.com, a research company in Naples, Fla. Overall, Americans today carry $2.6 trillion in all kinds of consumer debt, up 24% from just 2003, according to the Federal Reserve. At the same time, Americans don't save like they used to: The nation's savings rate, which was 7.2% of disposable income in 1950, stood at 0.6% in 2007, says the Bureau of Economic Analysis.
Increasing debt and decreasing savings--coupled with an economy making headlines for all the wrong reasons--spell trouble for many of those in hock. Delinquencies for credit cards are on the rise. During the first quarter of 2008, according to the American Bankers Association (ABA), bank-card delinquencies jumped 13 basis points to 4.51%. That is now above the five-year average delinquency rate of 4.4%.
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Warning signs of overextended credit, say experts at the ABA, include paying only the minimum payment month after month, running out of cash all the time, being late on critical payments like rent or mortgage, taking longer and longer to pay off balances, and borrowing from one lender to pay another.
Credit cards are important. They establish a credit history and can teach us how to manage debt effectively and responsibly. But they can also be treacherous. Psychologically, it feels a lot easier to use plastic instead of paper. Soon, the habit becomes too comfortable, and the bills begin to pile up.
Even if you have dug a deep hole, there are ways to rid yourself of credit card debt.
The first step: Know the enemy. Gather all financial statements, park yourself at the kitchen table and figure out just how much credit card debt you have. This is a pretty basic, straightforward starting point, but it's often one people don't do, simply because they're spooked by the idea of knowing the real cost of their financial obligations.
List each credit card with its interest rate, minimum monthly payment and next due date. "We don't want anybody having a late fee," says Gail Cunningham of the National Foundation for Credit Counseling. "Late fees are now in the $40 range. You are tossing good money out the window."
Next, stop using the credit card. Instead, for everyday expenses, start using cash. It's much harder to spend greenbacks than to swipe plastic. In fact, studies show that those who pay with cash will save up to 20% per month. The reason is simple: The feel of those dollars actually leaving your hands makes you think twice about parting with that money.
"I call this the green factor," says Howard Dvorkin, founder of Consolidated Credit Services and author of Credit Hell--How to Dig out of Debt. "When you take out that plastic, there is no pain involved. But using cash, that green stuff, is different: You know how hard you worked for that money. There is immediate pain in using cash. You will spend more if you're using plastic."
In Pictures: Seven Tips To Avoid Drowning In Debt
The best tactic is to leave the credit cards at home or make it inconvenient to use. As an extreme, you can put them into a safety deposit box. Dvorkin has even seen people freeze their credit cards in blocks of ice.
Also, review all of your spending. When choked with credit card debt, it's important to differentiate between what's needed and what's not. What activities can you cut out? Create a budget and determine what expenses can be eliminated. Every little bit of saving helps and, over time, can add up to a real difference in what you owe.
Danielle R., who preferred not to use her last name, lives with her husband about 50 minutes outside San Francisco. Two years ago, the couple bought a house. But then, last summer, Danielle's husband became sick with cancer. He was the sole breadwinner for the family, but now he was unable to work. Medical expenses began to accumulate, which the couple paid with their credit cards. They found themselves struggling. They haven't paid their mortgage in seven months.
Even before sickness struck, Danielle says that she and her husband lived outside of their means. "We spent it before we had it in hand," she says.
Burdened with $70,000 in credit card debt, Danielle and her husband made some real changes. They cut back on the number of credit cards they carry, from seven to three. They only use cash and a debit card. Also, they cut back on activities that they used to enjoy but could no longer afford. For example, when times weren't as tough, they loved eating out; now, they buy more groceries and only eat at home.
"We buy a lot less," Danielle says. "We live more in the moment, and we don't use the credit cards at all any more."
Another tactic, experts offer: tackle the highest-rate loans and work your way down. This will cut down your debt load the fastest. However, this strategy, while making the most sense financially, is often hard to do. So experts say an alternative method involves just initially working off one small balance, and then moving on to the next one, right down the line.
"A lot of people need a sense of accomplishment," says Cunningham. "They want to start with the lowest balance. They need one to knock off."
This strategy, also known as the "debt snowball' approach, is one that Jessica Austin is finding helpful. A 27-year-old from Fort Smith, Ark., Austin found herself mired in credit card debt while in college. And she's still paying for it today.
In 1999, Austin enrolled in school and starting signing up for credit cards, including a bank card as well as cards with retailers like Express and Abercrombie & Fitch (nyse: ANF - news - people ). "I was 19 and spending money that I didn't have," Austin says.
Within four years, Austin had racked up $7,000 in credit card debt. Soon, she was so stressed out from her financial problems, she says, that she couldn't concentrate on her school work. In 2003, Austin dropped out of college. Then, adding to that burden, health issues popped up. She didn't have insurance. Medical bills began to fill her mailbox.
Austin can't get a credit card now because her credit score is shot. She says that she couldn't get approved for a house, even if she wanted one. But, slowly, she is regaining control of her financial situation. She works two jobs and uses mint.com, a Web site that offers free, online budgeting tools. She pays off credit card bills, dealing with the smallest balances first.
"It helps you psychologically," she says. "It puts you in the mindset that you are accomplishing something, getting something done. It doesn't seem so tedious, and you can see the effects. You are seeing these bills go away."
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Another helpful tactic that pros point out: negotiate lower rates. Get on the phone with your credit card issuer and see if you can convince them to lower your interest rate. True, this strategy won't work so well if you have been late 10 times over the last year with your payments, says Curtis Arnold, founder of CardRatings.com and author of How You Can Profit From Credit Cards. But, he says, if you have been responsible, then call up the company. In fact, Arnold says this is a more effective tactic now than it has ever been.
"There is a big spotlight on the industry right now from the media and politicians," he says. "It is unprecedented. So they do not want disgruntled card members out there bad-mouthing their banks. You just tell them that you have a rate that you're not happy with and that you're seeing better card rates in the mail every day. If they hesitate, then ask to speak to the manager. Don't waste time. Then plead the case again and also say that you have been a good customer, have a good credit score, and that you are seeing offers from competitors all the time."
Arnold adds, "More than ever, they want to avoid negative publicity. It's a competitive market. Earnings are hurting. Their profits are down. If they start losing card members, that will only hurt their financial numbers even more. It will cost them significant money to replace you."
While you're at it, experts say, think about a balance transfer. Look around for a low-rate card but also remember to read the fine print: Does the low rate apply just to the balance transfer? Or also new purchases? Are there balance transfer fees? If so, how much? What are the annual fees? What happens if you're late on a payment?
It's the rules hidden in the tiny print at the bottom of the page that get people into trouble, says Dvorkin. "You may be in a 14% card and you get an offer to transfer to a 9% card. But that may only last for 12 months. Then they put you in a 24% card. Most people don't read the statements, unfortunately."
In Seven Tips To Avoid Drowning In Debt to make sure the minimum payments are always made. This strategy helps you avoid those painful late fees.
Arnold is a big fan. "It's not uncommon, even for the most responsible card members, to on rare occasions be late on a payment," he says. "How do you avoid that risk? Automatic payments. I use them on my cards. I don't have to worry about sending a bill in or logging online to make a payment. It automatically drafts the minimum to the account. I know that my account will be fine and that minimum payment will be taken care of and I will never be delinquent on the account."
Finally, ask for help. Check out the National Foundation for Credit Counseling. Each year, more than one million people receive counseling from NFCC member agencies, which offer services like budget counseling and education, debt management plans, counseling referral services and financial literacy courses.
Steve Soliz was turned down by a credit union when he applied for a debt-consolidation loan. He was referred to a counseling service called GreenPath Debt Solutions. Counselors there helped him create a budget to pay down his debts, and also negotiated with the lenders, getting them to lower the interest rates on his credit cards.
Soliz, now 32 years-old, has paid off four of his 11 credit cards, and nearly halved his debt to $23,000. He was even able to buy a new house in Chicago last summer.
"I feel completely better about my finances," he says. "There is still stuff to do. But I use the extra money to pay off debts."
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