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March 17th, 2009

Two Must-Do’s Before Eliminating Credit Card Debt

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Credit card debt increased in the fourth quarter of 2008 according to TransUnion. The average bankcard debt, per borrower, reached $5,279 at the end of last year. Unemployment recently hit 8.1% and many experts believe it could reach double digits in the near future. Credit card defaults recently rose to a 20 year high, reported by Reuters, and are headed to the 9 - 10 percent range. It’s no surprise that many consumers are searching for ways to eliminate their existing consumer debt. Debt consolidation and debt settlement are both hot topics these days.

Unfortunately, many tackle their debt problems without doing two very important things. Not handling these two items prior to setting out on the debt elimination journey will land you right back to where you started in no time.

Break Your Dependence on Credit Cards

Before you can do anything, you need to break your dependence on credit cards. Simply taking out a debt consolidation loan won’t solve the underlying problem.

If you use your credit cards for convenience, switch to a debit card linked to your checking account. You’ll still have the convenience of not carrying around cash but you won’t be adding to your current debt-load.

If you’re relying on credit cards to make ends meet because you’re running out of money each month, you need to take a close look at how much you’re spending and on what. This can be a difficult exercise for many but it’s very important.

You’ll need to take an honest look at what you can afford. If you’re using credit cards because you cannot afford your lifestyle then it’s time to adjust your lifestyle. Can you really afford cable tv? Starbucks 3 times a week? Your health club membership? Do you need the unlimited minutes calling plan for your cell phone? One could argue that you cannot afford any of these things if you still have credit card debt.

Until you stop relying on the use of credit cards for convenience, to purchase things you cannot afford, or to make ends meet, anything you do to eliminate your credit card debt will be quickly replaced with new debt.

Emergency Fund Time

Most financial experts recommend that you have 3 - 6 months worth of living expenses saved and accessible at any given time. Some are suggesting 8 - 12 months given the current job market or for those with higher income positions that may be difficult to replace quickly should you lose your job. This money should be saved in a safe and liquid account. Suggestions are savings accounts, money market accounts, and short-term CD’s. The goal is not to earn interest income or pad your retirement account, but rather to have enough money to help you get by during a difficult time.

If you do not have an adequate emergency fund saved up, you should consider saving for this prior to applying any extra money to paying down your debt. There are a couple reasons for this.

  1. If you do not have an emergency fund and you encountered an unexpected need for cash, you’d find yourself relying on credit cards again and wiping out the gains you’ve made paying that debt down.
  2. Credit card limits can be cut and accounts closed at the discretion of the creditor. If you pay your debts down instead of building up an emergency fund, lose your job, and then find that the creditor has closed your credit card accounts, you’ll be in a difficult spot.

Debt consolidation and debt settlement can be effective strategies to eliminate debt, however, if you haven’t eliminated your dependence on credit cards and properly saved in case of an emergency, you will find it difficult to break the debt cycle.
About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.

Post written by Chris Rocks

5 Responses to “Two Must-Do’s Before Eliminating Credit Card Debt”

  1. Aniruddha Says:
    March 20th, 2009 at 1:55 am

    Hello,
    Above article about Credit Card Debt is very nice, it is the real fact about it. I think this article will help to us to protect from unwanted spending, so thanks for giving such good article.

  2. gpogol Says:
    March 23rd, 2009 at 12:56 pm

    Never thought about building the emergency fund first. Makes tons of sense.

  3. Willy Will Says:
    March 30th, 2009 at 5:08 pm

    How do you save for a emgergency
    when every dime is going to the creditors ?

  4. Debt Settlement and Credit Scores Says:
    April 7th, 2009 at 3:06 pm

    […] impact of debt settlement on your credit score is largely dependent on whether you’ve already fallen behind on your […]

  5. Heartburn Home Remedy Says:
    April 15th, 2009 at 9:06 am

    I read your blog for a long time and must tell you that your posts are always valuable to readers.

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  • Chris Rocks is the Regional Director of the National Credit Federation (NCF). NCF is a nationwide membership-based organization that assists consumers recovering from a financial difficulty and those who need a significant increase in their credit score. Chris began his financial services career as a Financial Advisor helping young families with risk management and asset accumulation strategies. It was during that time that Chris realized that many of these young families also needed someone to guide their choices with regards to debt management. He made the transition into the mortgage industry where he first worked as a loan originator and later the Vice President of a small mortgage company. As Chris came across clients who had suffered through financial challenges and saw the difficulty they had in re-entering our credit driven economy, he discovered there was a real opportunity to leverage his unique background and help others. He can be contacted by visiting his personal site, GoodCreditLiving.com.

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  • Karen Lawson is a freelance writer with more than 15 years of experience working in mortgage banking and loan servicing. She holds BA and MA degrees in English from the University of Nevada, Reno. She enjoys writing informative articles about debt management and personal finance.

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