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The Credit Cruncher was conceived to help you to keep up to date with credit crunch and recession developments, it provides some helpful credit crunch advice and it addresses personal debt. The Credit Cruncher also seeks to explain how the credit crunch started and shed some light on the worldwide recession. Recently, we have begun to look at how BREXIT will affect the UK economy. Please feel free to leave comments where relevant.

15 Jun 2008

How to get out of credit card debt?

Put simply, credit cards are NOT your friend unless you are very canny in the way that you use them. If you have a credit card debt, you are leaving it late to sort it out, but better late than never as they say... Here's how you can effectively reduce your debt.
1. STOP spending on a credit card immediately! - if you are in a position where you are buying weekly essentials on a credit card (ie. you don't have enough in the bank to cover food and rent etc...) then you are in serious trouble and will need professional help - start getting help right now.

2. MAKE a budget immediately! - work out how much of your net income (take home pay or benefits) you will need to survive in terms or rent/mortgage payments, food, fuel and other essentials. The money over and above this is your 'pocket money', once this has gone, you must not spend until you are paid again.
If you complete steps 1 & 2 (remember to account for all your normal spending including insurances, any savings plans, car expenses, credit card payments - EVERYTHING. If you end up without any pocket money, or negative pocket money, go over your spending again, this time cutting out expenses that you can do without until you have at least something left over. This is called 'disposable income' because it is at your disposal for you to spend on a whim. I re-iterate that if you CANNOT manipulate your budget to yield any disposable income, then you may well be in serious financial difficulties, and let me stress that every month you spend more than you earn, you are making the situation worse.
At this point, let me stress that there is no point 'bending' the rules to make the budget look like you have more disposable income than you have, at the end of the day, any money you spend that you don't really have becomes a liability against your future income, your future SELF...
So let's take charge of the situation, its always worth taking a look at all those things that eat up your income to see if you can cut out some expenditure to give you more in your pocket - be ruthless, stop smoking, end any memberships of clubs you don't attend, don't even put money into savings if you have debts that cost you more than your savings can earn!

3. ONCE you have you budget, stick to it religiously - amend it regularly whenever direct debits are changed or costs increase and decrease. Make a budget for food shopping and you will be astounded at how much you can save. In our house, we have a cash float every week for food shopping- we go to the ATM and withdraw exactly the budget amount for shopping that week and that's all we spend. I am as guilty as anyone of going to the supermarket with a 'blank cheque' attitude time and time again, I used to see it and put it in the basket - no more...

Once you are in control of your spending, you should take a look at re-structuring your credit card debt. Here is my approach, you may not like it, but it has helped me reduce a $12000 debt to $3000 in about 18 months...
1. STOP any credit-card spending dead! If you don't have the money in your pocket or in the bank - don't spend. Use a debit card only NEVER a credit card except in an emergency.
2. Get the best deal available for your debt. In the UK, there is a fairly good choice of cards offering 0% interest if you transfer your debt onto their card - these offers are time-limited, so you may need to keep shifting this debt on from time to time. If you can't get 0%, then look for the lowest interest rate you can get and see if you can move the debt from your old card onto your new one. Most of these banks will charge a fee to move the debt, so make sure you find out how much it will cost (usually not much compared to what you will save..). Don't forget that the bank is hoping that you will spend money on this card, that is why they are offering you the deal - don't do it, otherwise all the good work will be undone...
I am going to call the amount owed the 'principle', the great thing about 0% deals is that every time you make a payment the principle is reduced as there is no interest eating up your payments. Having this represented in a spread-sheet and graph helps to illustrate progress and spur you on to cut the debt more and more. Every time you have an unexpected injection of cash such as a gift, bonus, commission payments etc.. think of paying off some of your debt before 'treating' yourself and the debt will soon be on the slippery slope. Don't forget that if you spend your money paying off your debt, you are 'treating' yourself in the future....
There is no easy way out of debt, and each set of circumstances will be different, so maybe my methods may not be the best way forward for each individual, but if any of what I have done rings true for you, I would be very happy to think that I have inspired someone else to beat their own personal credit crunch. Personally, I am very excited about getting to the point where all the money I use to pay off my credit card each month, will suddenly become 'disposable income'.
Please be warned though, if everyone did this overnight, the entire Western economy would collapse - honestly this is not a flippant remark - it really would have a devastating effect on the economy.

Related posts:
the decline of my debt
where did it all go wrong?
credit card update

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