Buyers’ Remorse: 10 Ways to Beat a Credit Hangover
by Jarrod Thalheimer
It’s economic Armageddon. House prices are cratering, banks are begging for spare change, and every politician within microphone range of a TV camera can’t wait to offer up rescue plans for everyone… except you, that is. Walking to work or eating leftovers might sound frugal, but your weekend binges at the mall — especially the incoming bills from this past holiday season — say otherwise. Here are 10 tips that just might help you look at debt and spending a wee bit differently in 2009 and beyond.
1. Don’t panic – First, calm down and stop hyperventilating. According to Lesley A. Hoenig, a bankruptcy attorney licensed in Michigan, Illinois, and Minnesota, realizing that your debt problem is not the end of the world is extremely important. “You will make it out of this situation one way or another,” says Hoenig. “What’s imperative is to make a definitive list of all the debts you owe.” She explains that doing this will help to ensure that everything debt-wise can be dealt with properly, which should help you breath a lot easier, thus avoiding a credit-induced aneurism down the road.
2. Pay off high-interest debts first – It’s always a good idea to pay off the debt with the highest interest rate first, advises Hoenig. “The higher the interest rate, the more interest that will accrue. With an APR of 30 percent it takes only three years before you wind up paying more than twice what you originally owed.” Determine which credit cards or debts are costing you the most interest, and work double-time at paying them off first. Remember, the two-fisted monster of compound interest works in your favor when you’re saving money, not when you’re borrowing it. After your plastic, next in payoff pecking order should be your loans, says Ken Clark, a certified financial planner and author of the upcoming “Complete Idiot’s Guide to Getting Out of Debt” (February 2009), specifically your mortgage, car, or student loans. “These companies are the most aggressive when it comes to reporting missing or late payments to the credit bureaus.” And, he adds — saving utility and medical bills for last is not a bad way to go. “These kinds of companies very rarely report late payments in a way that will hurt your credit score.”
3. Understand your credit score (and how you can improve it) – Credit scores may seem like the best-kept secret since Area 51, but Clark knows the truth. “The single fastest way to increase your credit score is to get an error removed.”
And don’t cancel credit cards you’ve already paid off if you’re seeking a loan. “Cut up the card so you won’t use it, but don’t close the account until after you get the loan you need.” One of the largest components of the credit score calculation is the balance-to-limit ratio, he explains, which basically measures how “maxed-out” you are. If you close a credit line you’re no longer using, it may have the effect of making you look more “maxed-out” than you actually are.
4. Double-down – As the endless flurry of bills piles up at your door, resist the urge to feel like a victim and instead come out swinging. When it comes to debt, one of the best ways to fight it is head on: start paying them off – fast. “Make payments that are at least twice the minimum payment” advises Hoenig. “The key is to stop spending money you don’t have… paying (bills) down is the best way to do this.” So while the vacation to Jamaica will have to wait, you can look forward to the sort of rejuvenation only decreasing debts can provide. It may not seem like a holiday at first, but the stress you’ll be relieving is undeniable.
5. Save those receipts – Price protection offered by stores is a gift only if you’re smart enough to keep your receipts. These days, retailers are desperate to keep you shopping with them exclusively, so they’ll go to great lengths to make sure you’re secure in your purchasing decisions. For example, a Nerf Vulcan NBF toy supergun bought at Costco in early December for $49.99 fell to just $14.99 less than three weeks later – a $35 savings (if you saved your receipt). All stores have different rules regarding price-protection guarantees, so check them out carefully. By the way, saving receipts also makes it harder to forget how much you’re actually spending every day – which makes sticking to a budget a whole lot easier.
6. Plan your spending – You wouldn’t take a trip without a map, so why should spending money be any different? Clark calls spending plans a necessity. “They are absolutely crucial — 99 percent of budgets fail because there are just far too many things to keep track of each month.” He suggests an effective way to create a spending plan: Use one bank account for all “variable” spending needs, such as groceries, entertainment, clothes, etc. “By depositing a pre-budget amount into this account (a sort of allowance) and then spending out of the ‘pile’ created, you’ll have a much easier time visualizing how much they’ve actually spent and have left to spend each month.”
7. Consolidate your debt – While most experts agree that consolidating your debt into one place can make it easier to keep track of, they do offer warnings about debt consolidation services in general. “I’m pretty cautious when it comes to debt consolidation programs offered by for-profit companies,” says Clark. He suggests approaching a family member first, or perhaps reviewing other sources. “Check out your local credit unions — many of these offer debt consolidation options that you can’t find at regular retail banks.”
8. Re-gift or pay the price – To most, the social suicide of re-gifting is right up there with belching in public or picking your nose at a stop light. Not so, says Jennifer Melnick Carota, expert giveologist at TheGiftTherapist.com, which provides advice on smart shopping and charitable giving. “Re-gifting is definitely a strategy to consider if you have high-quality items that just aren’t your style cluttering up your closet.” If you haven’t used something before, why not pass it on to someone who will make good use of it? Besides, any money you don’t spend on a gift is an extra few bucks you can use to pay down your debts.
9. Sell some stuff – You got in this mess because you bought too much stuff, so why not work at turning those past spending sprees into some cold, hard cash? Yard sales, eBay.com, even Craigslist.com are great ways to remove clutter and raise some funds to pay down debt. Beware selling too cheap though. “Many inexperienced or first-time eBay users end up selling really nice things for way too cheap,” says Clark. “Watch the auctions of similar items for a few weeks before you list your high-end items.” Also, Clark warns to beware of check fraud. “By the time the check gets sent back by your bank (usually five to seven days), they’re long gone with your valuables.” Seller, beware!
10. Grow up – Lastly, recognize you are no longer a child and resolve to take on the responsibility of living within your spending limits. Who cares if your best friend won’t wear anything but Prada? If she really is your friend, she’ll understand why you shop at Wal-Mart. Driving yourself deeper into debt doesn’t impress anyone, especially when it’s his or her couch you’ll end up sleeping on when you finally get kicked out of your apartment. Be an adult. Only give gifts you can afford and do everything you can to spend less than you earn. You’ll be glad you did.