Ask GFC 006: We’ve Maxed Out Our Credit Cards – Now What???

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Not many people even admit to being in this situation, at least not publicly. But GFC TV viewer Taylor H. has come clean, which means that she’s putting herself in a position to do something positive about it.

Here is her question:

Jeff,
What do you advise as the quickest, and most efficient way to pay off credit card debt? My husband and I bought a house almost two years ago. After being anti-credit card for four years, our mortgage lender recommended we each open one to boost your credit score and in turn lower our interest rate. Unfortunately, we followed her advice, and now we each have maxed out cards (totaling roughly $7000)! It’s causing huge financial strain on our marriage to pay more than the minimum each month.

Thanks,
Taylor H.

Don’t kick yourself for being in this position Taylor. A lot of people get into this bind, and it often happens after buying a house. That’s at least in part because there are almost always more expenses associated with owning a home than with renting. In your case, you may have gotten some bad advice along the way, but we’re going to talk about that.

Let’s see what we can do to straighten all of this out.

First Order of Business – Put Away the Credit Cards

The first thing in any crisis is to stop the bleeding! Since the credit cards are the source (but not the cause) of the bleeding in this case, you need to put them away. That means putting them somewhere out of sight, where you won’t be tempted to use them.

Along the same line, immediately dispose of any emails or regular mail showing up offering you a new credit card. This is a good time to let you know that credit card spending can easily become an addiction. The last thing you want to do is open up new credit lines.

Now I’m telling you to put the credit cards away, but I’m specifically not telling you to close the lines out. The mortgage person you spoke to was actually on the right path, if she was recommending taking out a couple of credit cards as a way of boosting your credit score. The higher credit score that will result, will enable you to get a better rate on the refinancing of your mortgage. The credit cards will actually accomplish that goal when you pay them off.

The real problem wasn’t the credit cards, but what you and your husband did once you got them. That’s what we’re going to talk about next.

Analyze How You Got Into This Position

Credit cards don’t cause people to go into debt – they just make it easier to get there. I’m sure that when your mortgage consultant recommended that you get some credit cards, she wasn’t thinking that you would max them out. The reasons why you did are something you and your husband really need to think about.

Since it’s only been about two years since you opened up the credit card accounts, get out the statements and review exactly what it was that you spent the money on.

This will indicate at least two possibilities, and which actually drove you to go into debt will help you to determine how to get out of it:

1. Did you use the credit cards to go on a spending spree to buy a bunch of stuff that you wanted, but didn’t actually need, or
2. Did you use the credit cards to pay for necessary expenses that your incomes didn’t cover?

If it’s #1, you will need to get control of your spending impulses. Credit cards give you the ability to buy what you cannot afford right now. If paying them off is an issue, you’ll probably be better off without credit cards entirely.

But if it is #2, your situation may be more complicated. It could be an indication that you have insufficient income to support your lifestyle. For example, if you have been using the credit cards to pay for groceries and utilities, because your income is covering the house payment and other necessary expenses, your basic cost of living may be too high.

Carefully evaluate which situation it is. If it’s #1, you have to control your spending habits. But if it’s #2, you may have to take a serious look at either reducing your basic cost of living, or increasing your income, so that you can achieve balance in your financial situation. Excess credit card usage can indicate that balance is missing.

Find Extra Cash Flow in Your Budget

Now let’s get to the mechanics of getting out of debt. In order to do that, you’ll need to create extra room in your budget to pay down your debts. You’ve indicated that the debts are causing financial strain, which tells me that your budget is stretched pretty tightly.

You and your husband need to sit down and do a deep analysis of what makes up your monthly budget. That includes income and expenses, big and small. You need to know exactly what you have coming in, and exactly what’s going out. That will tell you how much you have to work with.  If you don’t know where to start there are many budgeting tools that can help.

Most likely, you will need to cut some expenses. Carefully review each line in your budget, to determine that the expense is either completely unnecessary, or that it can be reduced. If it isn’t necessary, terminate the source of the expense. If it can be cut, do it, and do it quickly.

Look for Extra Income Sources

With your finances being as tight as they are, cutting your budget probably won’t produce the kind of extra money that you need. One of you or both of you may need to consider finding ways to increase your income.

There are a lot of possibilities here. One of you may be able to find a better paying job. Or perhaps you can participate in a bonus or referral program at work. Failing that, you may need to consider getting a part-time job. No, it won’t be easy, but it may be a necessary step until your credit cards are paid.

You should also consider if you have any personal possessions that you can sell for some quick cash. Start by looking at anything you may have purchased with your credit cards. If you don’t need it, try selling it. You can probably find several hundred dollars worth of items to sell in your home, and that can jump start paying off the cards.

Make Sure You Have Adequate Savings

Most debt payoff strategies ignore this step. But since your financial situation is tight, it’s an extra step that you may have to take.

If in analyzing the cause behind your debt you determine that you may be living beyond your means, you may need to create a cash cushion before paying off the credit cards. This will give you the opportunity to rely on savings – rather than credit cards – when you have a sudden financial need.  Make sure you put this cash in a separate savings account where you do not see it in your regular checking.

If you can get off the dependency that you may have built up with your credit cards, that will get you halfway through the process.

Employ the Debt Snowball

As to actually paying off your credit cards, I like the debt snowball method. The idea was originated by Dave Ramsey, and is referred to as a “snowball” because it starts small, but grows larger as it rolls forward.

In regard to credit cards, this means paying off your smallest credit card balance first. This is recommended because paying off the smallest credit line will be the most doable. But once that credit line has been eliminated – along with its attached monthly payment – you will have even more room in your budget to pay off the next largest debt.

You keep doing that until all of your credit cards are paid. Each pay off helps to empower you to take out the next credit card.

I hope this helps your situation Taylor, as well as anyone else who might be struggling with the same problem. All you need is plan, and you can make it happen.

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