Curing a Credit Card Hangover

Dec. 12, 2006— -- This is the first installment of Consumer Correspondent Elisabeth Leamy's new weekly "Savvy Consumer" column.

Do you have a New Year's hangover? Not the kind you get from sipping champagne on New Year's Eve. I'm talking about a credit card hangover from all that holiday shopping. I got my first credit card hangover in college. I was like many students -- a company issued me a credit card even though I had no job and no way of paying. I quickly racked up about $2,500 in debt. My parents bailed me out. I racked up another $5,000 in debt. This time I dug myself out, dollar by dollar. What an achievement! I can't tell you how good it feels to be free of credit card debt.

Here are some strategies to help you liberate yourself too:

Cut up all your credit cards
Are you feeling the withdrawal symptoms yet? Credit cards give us a sense of possibility that we just don't have with cash. They allowed me to live beyond my means for years. But I paid for it. Just as an alcoholic can't drink a drop without relapsing, a credit card junkie shouldn't have any credit cards. Zero. Zilch.

When safe, use a debit card instead of a credit card
You may argue that in this high-tech age, it's impossible to conduct business without a credit card. True, you can't pay cash when you shop online and hardly anybody uses personal checks anymore. But your argument falls flat in the face of debit cards. A debit card allows you all the convenience of a credit card, with all the limits of your own bank balance. It's an excellent substitute. (Be careful using a debit card online though -- a great subject for another column.)

Keep just one card and freeze it!
If you believe you must have a credit card on hand in case of an emergency, I've got a creative suggestion for you. Cut up all but one credit card. Then take the lone survivor and drop it in a Tupperware container full of water. Pop the container in the freezer and put your credit card spending on ice! That way you'll have to think about it for several hours if you want to use the card. You're unlikely to thaw this consumer culture ice sculpture to make an impulse buy. But if you have a true emergency, it will be there for you.

Impose a spending freeze
My financial planner boyfriend (now husband!) put me on a spending freeze back in my debtor days. I wasn't allowed to spend money on anything non-essential. For me, that meant no new clothes, no home decorating and no dinners out. Not using your cards anymore really is the first step in paying them off. Most people who are in a credit card crunch charge their cards to the limit, pay the minimum each month, then spend right up to the limit again until they get their next bill.

Send payments more than once a month
After you stop spending, you need to start paying. Here's how I did it. I didn't make much money in my credit card debt days. I lived paycheck to paycheck. When my credit card bill came, sometimes I didn't have much money to send in, so I sent what I could. At other times of the month, I occasionally had extra money. In the old days, of course, I would have spent it! Instead, I began sending money to my credit card company even when I didn't have a bill due. I pre-addressed and stamped several envelopes so I had them ready. Anytime I had extra money in my checking account, I popped it in an envelope and kissed it goodbye.

Use your savings account to pay off your credit card debt
Your savings account is another source. Sound sacrilegious? I get into this argument with people all the time. I know lots of smart people who have a savings account and credit card debt. It's ludicrous! I know, I know, you feel it's important to save for emergencies. Trust me, credit card debt is an emergency. But here's my less flippant explanation. If your savings account yields 3 percent interest and your credit card charges 19 percent interest, you can instantly "make" a 16 percent "profit" by using your savings account to pay off your credit card debt. That would be an impressive gain in the stock market! Then, instead of pulling out your credit card to make impulse buys, you could fall back on it in emergencies -- a much sounder use.

Beware of debt consolidation loans
You could also look for a debt consolidation loan, but don't count on it. Reputable banks don't make debt consolidation loans to people with no collateral. Crooked lenders may offer you a consolidation loan, but you'll probably find that the interest rate is actually higher than what you're paying on your credit cards. They'll try to trick you by offering you a lower monthly payment than what you currently pay, but the loan will last so long that you end up paying far more money than you should have.

If you own a house, you may be able to take out a home equity loan to pay off your credit cards. This option sounds great because you can then write off the interest you pay. But beware! Home equity loans come with closing costs, which just add to your debt. And there's a real risk here. Think of it this way: If you miss a payment on a credit card, you just lose your good credit rating. If you miss a mortgage payment, you could lose the roof over your head.