How to get out from under credit card debt

John W. Schoen Senior producer • Profile • E-mail

It’s the single most common question these days in the Answer Desk Inbox: I’m drowning in debt! What can I do?

I am a 77 year old person with a limited income and have used credit cards to the maximum and now find myself in a position ($18,000) unable to pay.  What are the consequences for me if I just STOP making any payments to the six credit card companies? 
— Nicholas C., address withheld

What should you do if the accounts are already delinquent, past due, charged-off, and not necessarily due to neglect? Paying these accounts will still show negligence, so what can we do, those already drowning in bad credit?
— Letina, Tallahassee, Fla.

Here’s our seven-step plan for getting the credit card monkey off your back:

Step 1: Reality check
Over the years, with the blessing of Congress and federal regulators, the credit card industry has created a repayment system that was skillfully engineered to put its customers deeper and deeper into hock. By keeping credit limits high and monthly payments artificially low, the financial services industry created a dangerous sense of well-being among borrowers.

Billions of marketing dollars have been spent to create this false reality. The first step to getting control of credit card debt is to remove yourself from the fantasy mindset that as long as you can make the minimum monthly payment, your debt is under control.

Step 2: Make a plan
If you haven’t already done so, make a budget. You really have no idea if you’re truly broke until you understand where your money is going. Gather three months' worth of bills and make a list of where it goes. If you’re a heavy ATM user, keep a “cash journal” for a month or make your best guess about where you spend. Include all family members to make sure they get the same reality check.

If your monthly expenses are bigger than your income, you have to make some tough choices.  There are no right or wrong choices as long as you can get your budget to balance. Try to classify as many budget items as you can as "non-essential." Consider a list of things you can sell.

You may not have to make all these cuts, but look for as many as you can. Your goal is to find enough savings to make a meaningful dent in your credit card and other debts, not just the minimum payment.

Depending on the outcome of this exercise, you have (roughly) two courses of action.

Step 3: Pay it down
You’ll have to come up with more than the minimum to make a serious dent in your debt pile. But let's look at the impact of increasing your monthly payment.

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If you added $300 to the monthly payment on that $18,000 balance, you’d save $47,600 in interest. And you’d be debt-free in just three years. If you can’t afford that much, a $460 monthly payment (just $100 more than your minimum) would save you $42,400 in interest and get you out from under in five years. (Our numbers are based on the Federal Reserve’s Web calculator. Try it out for your debt.) 

You‘ve got to stick with the plan month in, month out. Put your new monthly payment at the top of your pile of bills, along with rent, utilities, food and other “essentials.” Your credit card is now a “first of the month” bill and not something you try to chip away at when you have “spare” cash.

Have your paycheck direct deposited to your bank account and then set up an automatic bill payment for your credit card. These automatic payments will help impose a discipline to your plan: the money’s gone before you can find other “discretionary” ways to spend it. If you’re trying to go on a diet, it’s easier if you don’t stock the freezer with ice cream.

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