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Level 6

Credit Card Consolidation

IÔÇÖm trying to pay off credit cards I have had for quite a while & have not been making my payments ­čąÁ Would it be a good idea to try & have all balances transferred to one CC w/ the lowest interest. The other side to that is finding one willing to do so w/ my payment history. I am at a loss, unfortunately I made bad decisions when I was younger and I am now trying to fix all of it but I have not been able to get very far due to the fact that my credit sucks !!
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Level 20

Credit Card Consolidation

Unfortunately I made bad decisions when I was younger and I am now trying to fix all of it but I have not been able to get very far due to the fact that my credit sucks !!

You're not alone. I've been there, done that, got the T-Shirt. Overall, consolidating your loans does absolutely nothing to help reduce your debt. All you're doing is transferring debt from one location to another. When you find yourself so deep in debt that nobody will lend you money anymore, then the interest rate you're paying on your current debt just doesn't matter. Transferring debt to something with a lower interest rate really doesn't help either. The so-called "savings" is so minuscule that it really doesn't help at all. In fact, your transfer fees could just end up making your debt higher.  Besides, some credit cards that will allow you to transfer debt to them, will charge you a higher interest rate on that transferred debt, because they treat it like the cash advance it really is. Generally, interest rates for a cash advance on a card are higher than the already high standard rates on that card. Even if they say the interest will be lower or even zero percent, it's only for a specific period of time that is generally 6 months or less. Additionally, when you make a credit card payment, payoff of the cash advance is the "LAST" thing credited against your payment. So if you have a credit card with a $1000 balance on it, and $300 of that is the cash advance, your $100 payment does not pay down one single penny of the cash advance. You have to pay off the the $700 of "spent" money first, then you can apply payments to the "borrowed" cash advance.

So my point is, stop concerning yourself with consolation and interest rates. If you really want to get out of debt, there's two simple things to absolutely must do. Now while I say "simple" please note I did *not* say easy. While it's easy to wander into debt, it's just not possible for one to casually wander out of debt. It takes two things.

1) A Plan

2) Committment.

  • 7-Steps to get out of debt

Here's a simple 7 step plan. Now I say "simple", not easy. While it's easy to wander in to debt, one does not just wander out of it. It takes two things.

1) A plan
2) Committment

If you're not willing to do both, then stop reading. It's just a waste of your time.

Step 1 - When you find yourself in a hole that is to deep to get out of easily, the first thing you have to do is STOP DIGGING! In other words, get out the scissors and cut up the credit cards. Immediately. Right now. This very instant in time. Don't just talk about commitment. Practice it and prove your commitment. You're not proving anything to anyone else. The only person you have to answer to when it comes to commitment on this, is *YOU*. 

Now debit cards you can keep, since those will only work if there's actually a balance in the account that card is tied to, for the amount you're trying to spend. But all credit cards have to go. Once they're cut up, call the bank or credit card company and close the account - permanently. You will still get your monthly bill for that card and will still have to make at least the "minimum payment". But it's kinda dumb to keep a credit card if your intent is to not use it in your efforts to get out of debt. That would be like buying a spare tire for that old Ford Model-T rusting away in the backyard, because you "might" fix it up one day in the future. Either you make a total and complete commitment to get out of debt, or go home.

Step 2 - Separate "need" from "want". For example, you "need" to put gas in the car every week so that you can go to work every day to earn the money that will get you out of debt. You "need" electricity and water in the house. You "need" food in the kitchen. But you don't "need" to go out to eat on Friday. The only way you see the inside of a restaurant, is if you work there.

Step 3 - Stop ALL retirement fund contributions.yes, *ALL*. So stop contributing to the 401(k) and work, and no more contributions to the personal IRA or ROTH accounts. Now you may think this will hurt you in the long run. It won't. On average, most who follow this method will be able to restart their retirement contributions in 2-3 years - sometime even earlier. Look at it this way. If you don't pay off your debt NOW, then you "WILL" pay your debt later with that money you have set aside for retirement. I don't know about you, but I plan to use my retirement savings for *ME*, and not use it to pay a debt I incurred a decade or two before I retired.

Step 4 - Establish a $1000 emergency fund. The money should be placed in a regular savings account that is "NOT" tied to any debit card, and the account should "NOT" be accessible over the Internet making it to easy for you to get that money. This is an emergency fund. It needs to be a situation where, if you need any of that money you have "no choice" but to physically walk into the bank and withdraw it. Now-a-days, we've all become lazy in regard to accessing our money. So setting up your emergency fund my way, means it's going to have to be a "reaL" emergency before you're gonna take the time to physically go get it. having to physically go get it, gives you time to think about things such as "is this really an emergency?". You may change your mind - and that's to your benefit.

Now what do I define as an emergency? For me, basically if my next meal will be coming out of the dumpster behind McDonalds, then I am in the midst of a "real" emergency.

Step 5 - List all of your debts smallest to largest. (Do not include your mortgage on the house, but *do* include the HELOC if you have one.) This is referred to as your "Snowball Debt List". For items #2 and higher you make the minimum payment on those each month. Then you take every single penny  you can spare and throw all of it at the #1 smallest debt.  You'll find that smallest debt paid off in no time. Then the #2 item on your Smowball Debt List becomes your "new" #1 item. You continue to make minimum payments on all the other debts, while throwing every spare penny at  your "new" #1 item. Now that  your "old" #1 item is no longer on the list, that amount adds to what you're throwing at your "new" #1 item. So things are moving faster than you may have anticipated.

Now there is one, and only one exception to this "smallest to largest" approach. If you owe the IRS back taxes, I don't care where it falls in your Snowball Debt List. You pay the IRS ***FIRST***. The IRS is the monkey on your back that *WILL* turn into an 800lb gorilla rather quickly and will absolutely crush you. So for taxes, if you owe the IRS (and your state if your state taxes personal income) get that monkey off your back ASAP, before it becomes the 800lb gorilla that crushes you!

I found it helpful to keep a graph on the refrigerator of my total debt which showed the line in red for my total debt at the starting point. Then as I paid that debt down, I'd lower that red line by filling in the paid amount on the graph with a black marker. As more debt was paid, I was able to pay the remaining debt that much faster. Actually "seeing" that movement on a graph was highly motivational to me, very encouraging, and helped a lot be allowing me to "see the light" at the end of tunnel, knowing that it wasn't the headlamp of an oncoming train.

Step 6 - Once all that listed debt is paid off (on average, 2-3 years) you need to build up an emergency fund of 3-6 months of living expenses. How many months exactly, depends on the stability of your income. For example, if a majority of your income is from self-employment, then if you have a "slow season" you'll want to have at least 6 months of savings on hand, for those times when the he slow season may go longer, or produce less income than anticipated.  Whereas if you work as a salaried employee in a job that you're not likely to lose any time soon, 3 months of expenses may suffice. You just have to figure how long it would take you to find a new job or start another business if your present source of income just "disappeared" for whatever reason. Like, what if you're in an accident on the way to work tomorrow, are involved in an accident and end up in the hospital for the next 6 months?

Step 7 - At this point, you re-establish retirement plan contributions, maxing them out if you can. If you have kids, time to start that college fund. If you've been renting, time to start saving up for the land/house you want to buy.

Now in the process of doing this, there are several things one can do to "speed things up" for paying down that Snowball Debt list.

1) Reduce your spending. (Obviously, and already addressed in step #2)

2) Increase your income. There's all kinds of things one can do to increase their income, and it's not all that hard. No, you really don't "have" to go out and look for another W-2 job that will accommodate you around your work hours for your current W-2 job. You really only need temporary work to help you catch things up and get you out of debt that much faster. But hey, if you can hang for a 60-80 hour work week, go for it if you can find it!

One thing I did about 10 years ago when I decided to get out of debt, was visit my local Pizza Hut in my hometown and talked with the owner (not the manager, since the manager at this particular business did not have the authority to accommodate me.).

The deal I made was that I would work "off the books" as a non-employee for tips only on Friday, Saturday and Sunday night, but only if I 'felt like it". I agreed to give at least 24 hours notice if I would not be working one of those nights. Now I expected that while I might spend $40 in gas over the weekend, I would make $100-$125 dollars in tips giving me a $60-85 profit after buying my gas. Boy was I surprised? On Friday I delivered until closing at 2am. Did the same on Saturday. Then Sunday night I delivered until just before midnight. That weekend I made just over $350 in tips, and after the cost of gas had just over $300 left. So if you do something like that, it's perfectly feasible for you to increase your income by as much as $1000 a month and you could "still" take one weekend day off a month after working your 5-day 40-hour week job, and then delivering pizza's three weekend nights a week.

One week while working the debt snowball it rained for three days straight.  Of course, this didn't affect my income at all. However, there are quite a lot of sole proprietorship lawn care businesses in my town, and I know a fair number of these business owners. Knowing that when it rains they can't cut grass, it gets them behind on their schedules and if it rains for three days or more in a row, they fell like they'll never catch up. That's because when it rains Monday, Tuesday, and Wednesday, they still can't cut grass on Thursday because it takes a day for the drenched soaked lawn to dry out so they can run their riding lawnmowers over it without leaving deep ruts.

So I started calling my lawn care business friends and asking if I could help them catch up on Saturday. The 2nd or 3rd one I called welcomed the help, and agreed that I would be paid for each lawn, the same amount the client was contracted to pay them if they cut it. Got done delivering Pizzas about 2am saturday morning. Went home and got about 5 hours of sleep. When I awoke I loaded up my riding mower, weed eater and edger onto my truck and headed out. I cut, trimmed and edged six lawns that day before sundown and went home $300 richer for one, 8 hour day (give or take) of work. My lawn care business friend was happy that I helped him catch up, and I was happy to have an additional $300 in my pocket. A win-win situation for both of us.

So when it comes to increasing the income, the key is to think outside the box and get creative. Sometimes the dumbest ideas are the most lucrative.