Borrow More Money To Get Out of Holiday Spending Debt
By Ric Edelman
Too often, consumers foolishly overspend on gifts and holiday entertaining. You think they’ll just love that diamond tennis bracelet, but what they’d probably prefer is to stay out of debt.
But if the damage has begun, it’s time to fix it. Here’s my advice to help you get out (and stay out!) of credit card debt.
Step 1: Stop Spending, Start Paying
The first thing you must do is determine how much you owe. Start with a sheet of paper and on it, make four columns. In the first column, list the name of each creditor (who you owe). In the second, list the amount you owe that creditor, and in the third column, the interest rate each is charging. Finally, state in the fourth column the minimum payment you must make each month.
Arrange your list, showing first the creditor charging you the highest interest rate. Most people think their priority should be the highest balance, when in fact you should be worrying most about the card that’s costing you the highest interest.
Each month, make the minimum payment to each creditor, and then devote all remaining money to the creditor charging the highest interest rate. Pay off this debt first. Withdraw any money you have in the bank or elsewhere and use it to pay off that creditor, as well. Also, liquidate any other assets, such as savings bonds, mutual funds and stocks. Everything you own should be diverted toward eliminating your debts. Surprised? You shouldn’t be -- especially when you compare the 2% that your bank account is earning to the 18% that your debts are costing you. The only exceptions: your IRA and company retirement plans. Never stop investing in them and never touch those assets for anything other than retirement.
Step 2: Borrow More Money
It might sound like unconventional wisdom, but it really works: Go into debt to get out of debt. That means you need to borrow more money. Your only requirements: 1) the money you borrow cannot exceed what you already owe, and 2) the interest rate on the new debt must be less than the rates you currently pay.
See how this works? By borrowing $10,000 at 8%, you can use the money to pay off credit cards that charge you a higher rate. With so many banks offering low-rate credit cards to new customers, you should be able to reduce your interest charges while you’re working to eliminate your debts.
Keep in mind, though, that this is a temporary solution -- your real goal is to eliminate the debt, not just move it around. And don’t be fooled by creditors who offer low rates that rise dramatically after a short introductory period. Read the fine print, as some cards apply the advertised low rate only to new purchases, not to transferred balances. If you’re not careful, you could end up paying higher rates than you pay now, defeating the purpose.
Step 3: Staying Debt Free
The trick here: self-discipline. While you’re paying off your debts, it’s critical that you not run up any more. This means paying your balances off each month. If you’re worried you can’t do that, get an American Express card. Since it’s a charge card, not a credit card, you must pay the full balance each month, and this will help you curb overspending.
Another strategy is to write a check payable to the creditor (e.g., VISA, Mastercard, Discover) as soon as you use the card. Keep the checks in a drawer, and when the bill arrives, you’ll already have the payment ready to slip into the envelope!
As a last resort, put your credit cards into a cup of water and place them in your freezer until they are paid off. This way, the time and effort it would take you to "thaw out" the cards will help get you past the impulse to buy! Yet, by not cutting up your cards, they will remain available if you need them for an emergency.