The decline of my credit card debt

I am currently on the verge of defeating credit card debt for the last time - Yes I was stupid enough to get caught a second time with spiraling debt. The first time (more than 15 years ago)I was able to cash in an investment to take care of the bills, this time has been a harder path to walk.
I got to the point where I had decided that some action needed to be taken as, in using the tactic of just hoping that I would be able to reduce the debt obviously wasn't working. The first step is to STOP SPENDING - sounds obvious, but how do we achieve this?
In short, I made a budget looking at all income and outgoings and looked firstly for outgoings that were not required. Insurances that were not really essential, favourite treats that I could do without etc...
Next, I created a graphical representation of my debt - my accounts were already on a spreadsheet, so all I had to do was make a graph - this was to be my inspiration, a way in which I could see the debt coming down month by month.
Next I put all my debt on a '0% interest for transfer' credit card, this meant that everything I paid off my card actually came off the principle, but it only really works when you STOP SPENDING....
Over the next two years any windfall, bonus of monetary gift was primarily earmarked to pay off this debt, and the result can be seen below:


I started off owing more than $13,500 and now owe about $3000. You can see where I used a bonus payment in Dec 06 to rapidly bring down the debt, and again in Jul 07 - As it happens I have enough to pay it off, but that money is currently earning me interest whereas with a 0% interest credit card, the debt shown above costs me nothing.
I would encourage you to have a goal to aim for and a way of representing that goal, MS Excel is great at making spreadsheets and graphs, but the important thing is to be able to recognise your progress and feel encouraged and inspired by it.
The beauty of having paid off your credit card debt is that it frees up the money you were previously spending on debt or repayment, increasing your ability to spend or save as you please - when you have gone through this process I would think you would have to be crazy to abuse a credit card again.

Related posts:
where did it all go wrong?
how to get out of debt
credit card update

The Multiplier

The multiplier is a principle which demonstrates how the same money can be made to work harder within the economy. It may apply to both spending or saving but is easiest illustrated through spending:
If you imagine a worker receives a bonus of $100, he basically has three options, he could leave the money in a drawer, he could spend the money or save it in the bank.
If he spends all of the money on a special meal for his family, then his family have benefited to the tune of a $100 meal, and the restaurant benefits from the $100 spent. If the restaurant spends that $100 on new napkins, then another trader has had benefit from what is basically the same $100 in a relatively short time.
If the worker places the money in a drawer, then the benefits of that $100 are lost to the economy, and you might think the same if he banks it, but this is not the case.. Banks are obliged to retain only a proportion of deposits, and will utilise the rest in loans and investments. If banks are (for example) instructed to retain 25% of deposits, 75% can make it's way back into the economy, and if that $75 is also banked, 75% of the $75 can also go back into the economy meaning that already the muliplier effect has produced $131.25 (75+56.25) and can continue until $400 ends up sloshing around because of the original $100 deposit.

This idea may be a little difficult to get your head around, but the outcome is that when we decide NOT to spend, we deprive the economy of not just our money, but our money multiplied. So if we are going to be careful about what we spend (and I for one would advise that individuals should specifically ensure that they are not spending more than they can afford), there will be effects on the economy which will actually increase the credit crunch in the short-term.
Ultimately this may have an effect on money saved if people realise their savings to pay off loans and credit card debt or even to pay monthly bills. the combination of factors will slow down the economy, reducing spending, suppressing wage rises and making credit harder to obtain until something happens to restore market confidence.

The old adage 'it will get worse before it gets better' applies to no situation better than it does the credit crunch.

Popular Questions:
Will we all end up broke?
How long will the credit crunch last?
Sub-prime mortgages to blame?

Sub-prime mortgages are to blame?

Like a true politician, the best answer is probably Yes...and No...
Certainly the subprime market has been painted as the villain of the piece, and not without cause, but let's take a look at what happened with the luxury of hindsight:
What is sub prime?
After some years of decent growth in the property market, prices began to stabilise and the threat of dropping house prices was just around the corner. How does a mortgage provider cope with the likelihood of a slow-down? Well the short-term thinkers develop new 'products' and lending policies. Suddenly it is 'cool' to offer 100% mortgages, Heck if they could, some lenders would have tried 110% mortgages if they thought they could have got away with it! (don't tell me, these probably were on offer somewhere!!). 100% mortgages are sustainable where house prices are rising (the lender can get their money back) and where the borrower can meet their payments (as long as you meet the payments, negative equity is not really an issue...).
The subprime market is basically the dodgy end of the market where a more 'conservative' lender would assess the 'risk' as unacceptable. Bad lenders flew into this market in order to get accounts on their books. Bad hedge fund managers bought this debt without really understanding what they were buying. Financial institutions started to fall by the way-side and this time some of the names were big players. This type of debt is frequently bought and sold and some major banks got burned aquiring sub-prime specialists, and the upshot is that there is less capital available to lend, borrowing becomes more difficult and more expensive. In our Western economy, the effects can be widespread as our markets rise on fall simply on 'confidence' rather than actual performance.
So is this bad lending the only factor?
No... this other factors that have added sauce to this latest crunch is the fact that prices are rising fast, especially fuel and the knock-on effects of 'rocketing' oil prices. The effect has been worsened by the combined factors of reasonably static wages, a lack of market confidence and a generally lax attitude towards debt.

Credit cards - where did it all go wrong?

For some time, it has been becoming evident that since the advent of freely available credit, the pendulum has been gradually swinging over to the point where we are basically spending more than we earn. This is illustrated by a number of TV programs that deal with personal debt (Pioneered by Alvin Hall a number of years ago). Naturally, the TV programs dealt with the worse case scenarios but the dangers of spending more than you earn applies to everyone and is a trap that anyone can fall into.
Credit cards have enabled us to spend money that we don't have and put off paying for these purchases almost indefinitely whilst building up massive interest costs without even noticing. In the short term this can provide a massive boost to the economy, but only by 'borrowing' future expenditure.

Let's take a 'micro- economic' example to illustrate what happens on a much larger scale:
You want a new HDTV which will cost $5000, you have $200 in your bank account and a credit card in your pocket. In the days before credit cards, you would have needed to arrange an overdraft or loan with your bank. You don't really want to have to justify purchasing the latest TV to your bank manager so you see sense and start saving up for it....
In the days of freely available credit, you just take the plastic card out of your pocket and the new TV is yours... The money that pays for the TV will be be earned over the next year or so, you have 'borrowed' future earnings to pay for a current purchase. However, having this easy means of credit can cause you to spend the next twenty years 'pocket money' in a year and then want to do exactly the same thing again - this is the trap, and we have no-one to blame but ourselves. In macro-economic terms, the knock-on effect of you spending your future income now generates short-term wealth all around you - the salesman gets his bonus, the retailer makes profit and spends elsewhere generating a knock-on effect time and time again (For those who have studied economics, this is the 'multiplier' effect and is a major contributor to our Western economy) - some of this knock-on effect could even end up back in your own pocket...
If you can't already see where this apparently ideal solution to not saving up for stuff is flawed, then let me spell it out: You can only spend your future income when you curb your future spending to account for it.

Related posts:
the decline of my debt
how to get out of debt
credit card update

How to get out of credit card debt?

Put simply, credit cards are NOT your friend unless you are very canny in the way that you use them. If you have a credit card debt, you are leaving it late to sort it out, but better late than never as they say... Here's how you can effectively reduce your debt.

1. STOP spending on a credit card immediately! - if you are in a position where you are buying weekly essentials on a credit card (ie. you don't have enough in the bank to cover food and rent etc...) then you are in serious trouble and will need professional help - start getting help right now.

2. MAKE a budget immediately! - work out how much of your net income (take home pay or benefits) you will need to survive in terms or rent/mortgage payments, food, fuel and other essentials. The money over and above this is your 'pocket money', once this has gone, you must not spend until you are paid again.
If you complete steps 1 & 2 (remember to account for all your normal spending including insurances, any savings plans, car expenses, credit card payments - EVERYTHING. If you end up without any pocket money, or negative pocket money, go over your spending again, this time cutting out expenses that you can do without until you have at least something left over. This is called 'disposable income' because it is at your disposal for you to spend on a whim. I re-iterate that if you CANNOT manipulate your budget to yield any disposable income, then you may well be in serious financial difficulties, and let me stress that every month you spend more than you earn, you are making the situation worse.
At this point, let me stress that there is no point 'bending' the rules to make the budget look like you have more disposable income than you have, at the end of the day, any money you spend that you don't really have becomes a liability against your future income, your future SELF...
So let's take charge of the situation, its always worth taking a look at all those things that eat up your income to see if you can cut out some expenditure to give you more in your pocket - be ruthless, stop smoking, end any memberships of clubs you don't attend, don't even put money into savings if you have debts that cost you more than your savings can earn!

3. ONCE you have you budget, stick to it religiously - amend it regularly whenever direct debits are changed or costs increase and decrease. Make a budget for food shopping and you will be astounded at how much you can save. In our house, we have a cash float every week for food shopping- we go to the ATM and withdraw exactly the budget amount for shopping that week and that's all we spend. I am as guilty as anyone of going to the supermarket with a 'blank cheque' attitude time and time again, I used to see it and put it in the basket - no more...

Once you are in control of your spending, you should take a look at re-structuring your credit card debt. Here is my approach, you may not like it, but it has helped me reduce a $12000 debt to $3000 in about 18 months...

1. STOP any credit-card spending dead! If you don't have the money in your pocket or in the bank - don't spend. Use a debit card only NEVER a credit card except in an emergency.
2. Get the best deal available for your debt. In the UK, there is a fairly good choice of cards offering 0% interest if you transfer your debt onto their card - these offers are time-limited, so you may need to keep shifting this debt on from time to time. If you can't get 0%, then look for the lowest interest rate you can get and see if you can move the debt from your old card onto your new one. Most of these banks will charge a fee to move the debt, so make sure you find out how much it will cost (usually not much compared to what you will save..). Don't forget that the bank is hoping that you will spend money on this card, that is why they are offering you the deal - don't do it, otherwise all the good work will be undone...
I am going to call the amount owed the 'principle', the great thing about 0% deals is that every time you make a payment the principle is reduced as there is no interest eating up your payments. Having this represented in a spread-sheet and graph helps to illustrate progress and spur you on to cut the debt more and more. Every time you have an unexpected injection of cash such as a gift, bonus, commission payments etc.. think of paying off some of your debt before 'treating' yourself and the debt will soon be on the slippery slope. Don't forget that if you spend your money paying off your debt, you are 'treating' yourself in the future....

There is no easy way out of debt, and each set of circumstances will be different, so maybe my methods may not be the best way forward for each individual, but if any of what I have done rings true for you, I would be very happy to think that I have inspired someone else to beat their own personal credit crunch. Personally, I am very excited about getting to the point where all the money I use to pay off my credit card each month, will suddenly become 'disposable income'.
Please be warned though, if everyone did this overnight, the entire Western economy would collapse - honestly this is not a flippant remark - it really would have a devastating effect on the economy.

Related posts:
the decline of my debt
where did it all go wrong?
credit card update

The Credit Crunch

The 'Credit Crunch' is now an everyday expression featured in news and current affairs on a daily basis at the moment. Many have been able to see this coming for a while, and the reasons behind the crunch are not that difficult to comprehend, the remedy however is not particularly agreeable.

My advice is to take a look at your own personal finances today and start to make a difference where you can, every day that we ignore our debt is a day wasted. The areas of concern for me is the level of debt that is apparently deemed 'acceptable' in our economy. Personally the acceptable level of debt is zero, and I am working towards paying off my credit cards every day until I have reached it. Why not join me and pledge to rid yourself of debt.

The internet is peppered with advice about how to make money quickly, I worked out once that actually the quickest way to 'make' money was actually to save money as you can 'make' money instantly by pledging to save yourself money. I wrote a 'squidoo' lens entitled 'how to make money quickly'. It repeats many of the sentiments found here, but comes at the problem from a different angle. Please feel free to read that article alongside the information that you read here.

Rachel Henderson has written an excellent guide called 'Easy Money Management' splitting money management up into six, easy to digest modules entitled:

1. How to calculate your current situation
2. How to keep a monthly budget
3. How to assess what you owe...
4. How to assess what you save...
5. How to spend less
6. How to earn more

This is a really useful guide and is available from the turnonepoundintoonemillion blog by making a donation. There is lots of good information out there to help you get your finances under control.

Related posts:
Government Intervention
Is this the new Great Depression?
Credit Crunch News
The Multiplier

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