Breaking Down Debt

Posted: July 13, 2009 in Credit card debt
Tags: , , ,

or….  How a serious shopoholic eliminated $40k of credit card debt and student loans in about 2 years

So now, for something completely different from my normal game and tech obsessed blog-fare.  I’d been meaning to write this for some time now, but the timing never felt quite right, as I hadn’t fully kicked the entire debt I’d been carrying.  But it’s gone now completely as of just a week or so ago, ironically being replaced with a gigantic home mortgage – but that’s a tale for another day.

Almost 3 years exactly now, I began on a quest to whittle away at a seemingly endless pile of debt, built up from horrible spending habits without enough income to support them, building over too many years to count.  Games, consoles, gadgets, computers, CDs, DVDs, presents, trips, and general frivolous spending had created a monster I was unequipped to deal with.  At the maximum point, I think I had over 20 active accounts with some degree of debt on them; it was absolutely out of control, and so was I.  Now I’m not going to pretend to be some sort of economist or expert, but I will convey the process I went through as best as I can to dig my way out of this abyss, and hopefully someone out there might find something useful in it to help themselves.

The Hardest Part

Sorry to sound like some sort of self-help guru, but step one was by far the most difficult part of the process.  At some point in time along the ride, I realized the whole thing was as much, if not all, a mental game within myself.  The numbers don’t lie or cheat, nor do the credit card companies you signed up for (as much as they try) – it’s up to you to be strong enough to work within those rules without giving up your sense of self.  But I’m getting ahead of myself.

The first step, which should be no surprise, is admitting to yourself you have a problem, and that you are really going to do something about it.  Yes I know it sounds corny, but I went through a countless number of missteps and lies to myself about what I was doing before I finally, truly, addressed the issue within my psyche.  It’s very easy to fall into a classic spiral, where you do something wrong, it makes you feel bad about yourself, and then to make yourself feel better you just do it some more.  You try to tell yourself it’s the last time or you’ll stop the next time, but you know inside you’re kidding yourself.

So yes, on some level, for years and years I knew I had “shopoholic” debt issues, and I’d even worked once with a credit consolidation process in the past, but nothing ever seemed to stick.  I just gradually dropped right back into the same spending patterns again.  A little on this card, a little there, open a new card, put this on a new line of credit, and before I knew it, the level had ballooned to the $30k level.  Every new gizmo that came out I had to have, every new game console, this on top of regular buys of CDs, DVDs, games and other entertainment items.  I tried all sorts of different ways to try to get my act together, including buying MORE gadgets as inspiration to get my act together and feel less depressed.  But nothing worked, mostly because I was too afraid to just get it all together and accept the big picture for what it was.

Finally, about 3 years ago I made the leap to get serious and take personal responsibility for my debt.  It was a painful process, and I procrastinated like hell, but I gathered up some courage, sat myself down, grabbed every single one of my bills and summed them all up.  It was horrible and frightening and the numbers were even worse than I’d imagined, but once it was there in front of my face I couldn’t help but face it head on.

Getting Organized

You really have to find a system that’s going to work for you personally – I know it sounds like a copout if you’re looking for a specific method, but I do think everyone has a formula that speaks more directly to themselves.  For me, after trying different money programs, organizational databases and gadgets, what ended up working was a simple spreadsheet on a laptop, eventually on the Macbook Air (MBA).  The spreadsheet was designed to be as simple as possible but with enough information on a single screen as possible.  The MBA became more important later because of the whole “instant on” factor (meaning as soon as I lifted the cover the spreadsheet would be staring at me) as well as the portability factor (no more using laziness as an excuse to not look at finances).  It’s hard to avoid something when it is so easily at your fingertips and so easy to use – that’s my theory for myself anyway.

The spreadsheet has columns for the name of the credit card company, last 4 digits of the account, the interest rate, total amount owed, minimum payment and credit limit.  To the side of that was a date and the total amount of debt on that date to help me track progress.  Below that I kept a summary of what little savings I had managed to accrue over the years.  Everything was there to be faced on one easy to understand and inescapable screen.

Once this was all clearly laid out in front of me, some things became glaringly obvious.  I had some of the highest balances on the worst interest rates, for absolutely no good reason.  I had some very good rates and max balances that I wasn’t taking advantage of.  The way I was making payments was completely sporadic.  It was a total mess with no rhyme or reason, and really required nothing more than common sense to sort out.

The Most Important Step

As stupid and simple and obvious as this sounds, the most important step to take once having all those debts listed down was to make every minimum payment ON TIME.  I cannot emphasize this enough, as obvious as it is.  Sure, interest was killing me, but $20-30 late fees a month were killing me worse.  Because many times the minimum payment covered just the fee and maybe some interest and nothing else, ensuring no progress would ever be made.  The sad part was my late charges were probably 99% my own fault, I would leave a bill stuck in a pile or in some odd location and find it too late, generally once or twice a month.  With 20 different bills a month I gave myself the excuse it wasn’t my fault I got confused.  But the fact was I almost always subconsciously knew when I had “forgotten” a bill somewhere, it was still all part of the fear factor of facing, even looking at, certain bills.  But discipline on this one point is absolutely critical, and I made a silent pact that I would not get another late fee if I could help it.

Attack ’em One at a Time

Using balance transfers cautiously, I started shifting things around to take advantage of the best rates I could get.  Generally because I didn’t trust myself to pay something off in time, I looked only for the type that was indefinite, which eventually got me rates like 4.99% with a 3% fee on a good day, and even better later on.  You have to be careful with these (especially nowadays) because sometimes the 3% up front fee kills the whole utility of it.  At the outset though, I knew I had such a long way to go that the fee would be worthwhile in the long run.  Reducing the number of companies owed to was extremely helpful and a big motivator.  Discover Card was one of the best in this regard, they had a new card offer with 0% on transfers for a year – so that became one of my first big “moves” in the debt reorganization.

The plan was to use the re-organized numbers to attack each one at a time, with the worst offenders (highest interest rate and/or balance) getting hit first and hit hardest.  Some steady debt like school loans and the best transferred balances, I continued to just pay the minimum monthly, with the goal being to put as big a chunk as possible on the top offender each month.  The hard part was paying minimums on other accounts with big balances, as it would constantly feel like no progress was being made and the interest rates were still not the best on these.  And of course I had to keep an eye on the Discover Card which had a distinct time limit.  This  was the tricky part – not coming through would just introduce a new wave of interest debt, which of course I was trying desperately to avoid.

The final part of the puzzle was what to do about continued spending.  You have to know yourself and your limits, and I knew my compulsive spending could only be reined in so much, and I didn’t want to “punish” myself, so I started first to limit the number of credit cards in use.  Ideally I wanted it to be one card only, but as it turns out, 4 seems to be my magic number (1 for online stuff, 1 for general, 1 for Amazon, 1 for Apple).  Regardless of the number, the plan was to always always always pay these off completely each month.  I tried to buy less of everything, not necessarily killing my tendencies cold turkey, but just be a bit more discerning.  Things like iTunes helped in reducing CDs bought (I’d just buy singles), and I started buying less DVDs in favor of Blu-Rays that I knew I wanted in a long-term collection.  I won’t claim to have turned around completely, but I made a few adjustments that helped.  Having less cards accruing regular balances also helped in seeing just how much I was using/wasting on entertainment, and that was a bit sobering.

Obviously all of this was a tall and improbable order to someone who had not shown proper discipline in the past.  Paying minimums on a dozen or so accounts, a big chunk on one account and paying off 4 other cards completely each month is fairly overwhelming.  Not to mention I was also trying to save a little each month as well (more on this later).  The fact is I did not succeed at first.  If you watched the timelines I mentioned carefully, you may have thought I made an error in the blog.  But there’s no mistake – aside from me not adhering to the plan well.  A little over a year into the experiment my debt levels had creeped to their highest point ever, a whopping $40k.  I almost gave up.

Believing in the System

You might be wondering at this point what the heck I was thinking or doing with this so-called “plan”, or why I didn’t try something else or seek some professional help.  Well, the fact was I knew in my heart the sheet wouldn’t lie and I truly believed in the system.  Even with the numbers saying otherwise, I felt like I was making progress on some level, at the very least in terms of the number of different companies I was paying.  Unfortunately things like Christmas and new tech from Apple kept getting in the way, tempting me to the dark side.   An unplanned move made things much worse as well.  But I kept notes on what I was spending on so there were no surprises.  I knew where my money was going and for the most part it wasn’t going to interest as much as it had been in the past.

I held fast to the “no late fees” rule and I was proud of myself about that.  There was some progress being made on some of the longer term debt, even paying minimums only.  It was just a matter of letting things settle down to allow the system to work its magic.  It’s also worth mentioning here that I checked my credit score right around this period, a little before the highest debt level, and it was a cool 733.  Go figure.  I believe I was rewarded in this case for having a lot of debt and always making the payments on time, I guess they like that.

This is not to say it wasn’t hard to keep going forward, there were times I got extremely frustrated.  Even when I look back at the sheet now I have to shake my head in disbelief as to how I allowed things to get so bad.

Motivation – Save a Little

Staying motivated, as mentioned, was difficult.  I read an article that mentioned even if you had a lot of debt, it was important to keep saving as much as was reasonable, even if financially it would be better to use the money to pay off debt.  They had a number of reasons, but I think the psychological ones were the most important to me.  It made me feel a bit better to have some savings, small as they were.  I started tracking the ratio between what I had saved and what I still owed – it started out as a small fraction, and slowly but surely inched its way forward.  I still remember how happy I was when I finally was able to get the numbers roughly equal.  That was a major milestone and having that to work toward made things a bit more bearable.

Turning it Around

I must admit I did a couple things beyond the scope of the “plan” to eventually jolt myself forward.  I had a couple pockets of money that I tried to leave untouched, but at this point it really seemed to make no sense.  For many years I had been paying $50 a month to a life insurance company that was supposed to be serving as both insurance (meant to pay off all my debts in case I died) and some sort of savings.  I took a hard look at that and realized the insurance wasn’t nearly as good as what my company gives me for free, so I took all that money out and made a nice dent in the debt.  I also had been doing something similar with mutual funds, $50 a month for a few years.  I stopped that as well, took the money out and used it to pay down a bit more.  Both cases I lost some money overall, but it was worth it.

The “jolts” became like rallying points, and if they got one balance down close enough, I’d re-focus my effort to completely eliminating that balance.  Each elimination felt incredibly good, and eventually even the long torturous school loans ran out.  Once the ball is rolling, it really began to move quickly, as of course you start to have more and more available monthly to knock down another balance.  And because of my good credit standing, I eventually had only the absolute best rates to choose from in terms of transfers, so by the end I was just ignoring new offers as the transaction fees made them a detriment to me.

Over the years, I also got a couple raises and bonuses, and even a decent promotion at work, and all that helped out tremendously.  It’s odd how once things started turning the corner, everything got easier and easier.  I lost track of some of the numbers this last year, so I don’t recall exactly where everything came around so dramatically, but I do recall the feeling when it did, and how good it felt when I finally could see the light at the end of the tunnel.  At that point, my savings to debt ratio had flipped over, and I was starting to assess my goals in how many times over my savings were over the debt.  It felt great.  The sheet became more a measure of success, rather than a file I feared to open.

Epilogue

Having been on the deep side of bad credit card debt, I often wondered at the insidious logic of credit card companies – everything in their systems are poised to keep struggling people down, as all the best offers and best rates and services go only to the people who really don’t need them.  When you are down and out and your credit rating is poor, every little thing hurts more and is that much harder to get over or around.  I realize this is the way they make money, but that doesn’t make it right.

I got sucked into the credit card game at an early age, my first year of college I believe.  As much as I understood the concept of needing to pay it back, it just felt like magic money, and slowly but surely it became a psychological compulsion.  I don’t know if I’d classify it a disease as much as a drug; either way it felt in many ways similar to an addiction.  The problem with this addiction is it generated an ever increasing debt that many times felt insurmountable.

Choosing to face it was step one, and as I said the biggest step.  Coming up with a solid, logical plan and adhering to it was the next big thing.  Finding a method that worked for me in terms of keeping the problem organized and finite was also critical.  The most remarkable thing about the process was that I didn’t feel like I was compromising my identity, and I was able to save a little bit of money over time as well.  I made some changes in my spending habits, but for the most part, I still kept up with the majority of the things I wanted the most.  This of course made the process take longer than it might otherwise have, but I think it was more  important to me that I felt comfortable and happy about the way I was going about it.

Anyway, that’s my story – hopefully someone having problems with debt or have shopoholic tendencies can get something positive out of it!

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Comments
  1. Ken says:

    Hey congrats!

    My wife and I recently got out of a $25K debt, and it feels great. We did an excel spreadsheet, which you might have seen, and that was a great tool to have. I made a monthly projection on what our debt will be (not entirely accurate, but it gave us a good idea when we would be out of debt) It took us just a little over 2 years to pay it off.

    We did ours a little differently. We decided to pay down the lowest balance with the highest interest, so that we would see some quick progress. We felt that if we didn’t see quick results it would be much harder to follow through. Each payment would be the minumum payment + the finance charge. After all of our bills were paid, we would put our extra money that was left over towards that credit card. Each month our payment would get bigger and our debt would get smaller.

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