When you find yourself in credit card debt it can feel like a financial prison. Suddenly, you can’t go out to eat, pick up a new shirt, or even go to a movie without worrying about the fact that you are increasing your debt or using cash that could have gone to paying down your credit card balances.
Before you can figure out how to get out of credit card debt, you have to understand the reason you are in your current position. As most financial articles and planners can tell you, there are typically three major causes of people falling behind on their bills:
1. Emergency situations such as a health crisis, legal problems, or divorce. These are often one-time events that can derail you in the short-term but are beyond your control in many cases.
If you are currently in credit card debt for a black swan event such as finding out you have cancer, your spouse of forty years leaving you and demanding a divorce, or getting sued after your teenage kid drove drunk and killed someone – the problem probably isn’t how you spend your money. Life got in the way of your plans. It sucks. The best you can do is start over, perhaps after a bankruptcy filing.
2. A drop in income from losing a job or lower business profits without a corresponding decrease in fixed expenses. You avoid changing your lifestyle because you keep thinking another job or a pickup in the market is right around the corner. In the meantime, you bleed through your savings, investments and start building credit card debt.
I get messages like this at About.com, especially during the height of the recession. People making incomes significantly above the national median of $52,000 per year – often comfortably in the six-figures – were laid off and instead of cutting their expenses, they kept waiting until things turned around for the better. They kept the lawn care service, the nanny, the $35 bars of soap, the Charvet shirts, and the Gieves & Hawkes tailored sports coats.
Over weeks and months, without realizing it, suddenly the checking and savings accounts are empty, the credit card debt has crept upward, and if they weren’t able to make the house payment, the 401(k) accounts have been tapped (which is a horrible mistake in many cases because you can often get a bankruptcy judge to leave your retirement assets out of bounds for creditors, protecting your long-term financial plans).
The only way out of this credit card debt situation is to go from a Nordstrom and Neiman Marcus lifestyle to a Big Lots and Wal-Mart standard of living. If you really have the rare skill set, such as being a respected CFO of a major corporation, the odds are you will eventually make big money again. But you have to financially survive in the meantime and every day that passes puts you further behind the eight ball. If, heaven forbid, you were to enter negative amortization then it could be game over quickly.
3. Overspending due to living beyond your means or lax financial oversight so you don’t realize how high your expenses are relative to your household income.
If you make $1 and you spend $1.05, at some point, you are going to lose everything. If you earn $1 and you only spend $0.70, putting the $0.30 surplus into retirement accounts and good, solid long-term investments, over time you will grow richer. It’s basic math.
Maybe you picked up one too many lamps on Home Shopping Network or took a few too many vacations. Whatever happened, until you figure out how to spend less than you earn, you are screwed. There is no escaping your ultimate fate – you and credit card debt are going to be lifelong friends as long as the banks are willing and able to enslave you by your own free will.
To help you understand some tips and tricks for paying off credit card debt, I wrote 10 Steps to Paying Off Credit Card Debt over at the Investing for Beginners site at About.com, a division of The New York Times. Take some time to go over it; I hope you find it useful.