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The $10,000 Credit Card Challenge

 

Thinking about conquering your mountain of debt but too scared even to give your debt much thought? Read this real-world scenario of how one person erased $10,000 of credit card debt within a few years.


Ever wonder how some people deep in credit card debt manage to come out on top financially? This is the hypothetical but realistic story of Emily, one person who dug herself out of $10,000 in credit card debt in just a few years.

Never a big spender, Emily was shocked when she noticed that her two credit cards had a combined balance of $10,000. What happened?

* Emily took a lower-paying job when the economy went bust at the turn of the millennium.

* Hoping her lower income would be temporary, Emily didn't sell her house to get one with a lower mortgage. She didn't sell her expensive car to buy a cheaper one, since she would get much less than she had paid for it. In reality, the thought of driving a less-nice car was painful

* Emily paid only the minimum monthly credit card payment most months. She was paying interest, and interest on interest, buying the privilege of having the credit card company hold onto her debt another month.

* When one of Emily's credit card balances got within a few hundred dollars of the credit limit, her interest rate on the card skyrocketed from 17 to 27% .

Loans: Emily's Salvation?
Emily considered taking out a loan to pay off her credit card debt. She owned a condominium whose property values had increased 40% since she bought it, so she could easily get a good low-interest second mortgage.

But a loan scared Emily: it would mean admitting her debt would not go away soon. Besides, Emily wanted to get rid of her debt, not trade (her unsecured debt for secured debt). Plus, she knew that if she ever couldn't pay the second mortgage, she would lose her house, while failing to pay credit card bills would just mean a ruined credit rating.

For about a year, Emily argued with herself over whether to take out a loan to pay off her credit card. Then catastrophe hit: her beautiful car was totaled in an accident. While shopping for a new car with friends, Emily finally had to admit to herself that buying another car like the one she had had would be financial suicide.

Finding an Answer
Emily cried and cried as soon as she got home from the car dealership that day. It wasn't just that she would have to admit that she wasn't someone who could afford the car she had been driving. When Emily's parents were her age, they had already bought a five-bedroom house; Emily's one-bedroom condominium was already a stretch. If she ever got married to a man with the same financial picture as she had, she wasn't sure they'd be able to afford children. Growing up, her parents had always told her she'd do better than they had. What went wrong?

Emily did not have to think hard about what went wrong. Her father had been able to pay for college with what he earned at summer jobs, and then got a manager-level job straight out of school. Between college and graduate school, Emily had accumulated $70,000 in student debt that she was still slowly paying off. Houses in Emily's town, even adjusting for inflation, cost several times what they did when Emily's parents bought one. Cars had leaped in price about as much. The only thing that hadn't gone up was income.

Unable to cope with having less than her parents had, Emily had used her credit cards.

Solving the Problem
Emily knew that since her lack of financial skills had dug her into her rut, she would need outside help to dig herself back out.

She had heard about credit counseling services that took large chunks of the payments you made against your debt, so she was careful. She found a counseling agency that was a member of the Better Business Bureau, American Association of Debt Management Organizations and whose credit counselors are certified through the National Institute for Financial Counseling Education. Doing a quick search on the web, Emily verified that these were organizations with real standards and not just empty names.

Here's what Emily got from the credit counseling service:

* Relief. Emily was relieved to learn that her $10,000 credit card debt is in fact about average for Americans. The credit counseling agency showed her that even if she didn't have the advantages she had–a decent job and home equity–she would be able to rid herself of her debt if she just faced up to it.

* Surprise. The agency urged her to put money away for a rainy day fund, even as her credit card interest mounted. But once she started saving, she felt amazing. She realized she had been under enormous stress from always being one paycheck away from poverty.

* Understanding. The counselor understood Emily's reluctance to take out a loan, and helped her create a budget that would let her pay off her consolidated debt within a few years. Besides the car, all Emily had to give up were smaller expenses.

* Clarity. With her finances planned, Emily could think much more clearly about her financial situation. She figured out how much more money she would have to make to have her desired lifestyle, and aggressively pursued a new job. Starting fresh with her new coworkers, Emily focused on meeting people who were less materialistic–and even met her fiancé.

Though her fiancé has no better financial prospects, Emily's confident they can afford to give their children all the essentials she had, even if in a smaller house.

After all, Emily knows that solid finances are just as good a shelter as a roof over your head.