Credit Card Debt: 7 biggest mistakes I made

If you are new to the blog, click HERE to start at the beginning of my story.

POST #13
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The first 90 days of debt settlement are fairly uneventful.  You are making a lot calls to your creditor, retelling the same story over and over and logging everything that is said. The action in debt settlement starts to happen around 100 days.
This post will address some of the bone-head mistakes I made with my credit cards.
Let me say upfront, credit cards are not evil. Neither are guns. But both can be abused and both can kill you. I was one of those consumers that loved to charge stuff. Never did I consider the true cost.
When I was making tons of money, my thinking was, “I will pay this in full at the end of the month.” And I did.  When I was NOT making tons of money, my thinking was, “I need this now. Money will come in and I’ll pay for it later.” But the money never came fast enough. Never does when you think this way.
There was a fundamental idea I was misunderstanding. We have all been told this, but it doesn’t make sense until you are facing bankruptcy and you try to figure out how you got there.  Here is the simple truth.

CREDIT CARDS ARE VERY EXPENSIVE –

UNLESS YOU PAY IT OFF EACH MONTH.

First 4 digits of a credit card
Image via Wikipedia

You have heard the following explanation before, but if you are reading my blog because you in trouble, it’s likely you didn’t absorb the idea.

Let’s say you have $10,000 on a credit card at 15% interest (a modest rate these days!)

If you make the minimum payment plus 1% of principal, you will pay $225/month. At that rate,

It will take you 335 months to pay it off.

You will pay $11,979.29 in interest.

That is absurd. So that jacket on sale for 50% off that I just HAD TO HAVE really cost 20% more than retail. I would have been better off paying full price in cash. Wow cash, what a concept!

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TOP 7 MISTAKES I MADE WITH MY CREDIT CARD


  1. Spent more money on my card than I earned that month – I ACTUALLY DID THIS!!!

  2. Opened as many cards as I could, just in case I needed them.

  3. Played the shell game with 0% cards

  4. Justified spending because of airline points – completely idiotic!

  5. Used them on luxury items for retail therapy.

  6. Used them for business expenses that I didn’t really need for my business.

  7. Yo Yo spending. Maxed out the card. Paid it down. Maxed it back up.

There are million ways to abuse credit cards. Now, I have 3 credit cards with minimum balances and low APRs. I have them strictly to build my credit and use in case of an emergency. Everything else is paid for using my debt card or checks. There is no overdraft protection on my bank account. So, if I don’t have it, I don’t spend it!  What a concept!
Stay tuned. Stay afloat. Wealth and freedom are in your future.
Jonathan

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Credit Card Withdrawal

If you are new to the blog, click HERE to start at the beginning of my story.

POST #12
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At this point I am on the path to becoming debt free.

  • I acknowledged that I needed to make a change.
  • Chose debt settlement.
  • Found the right debt settlement company for my needs.
  • Stopped making payments.
  • Called my bank to let them know I was in a financial hardship.

NOW WHAT?

This next step in the process was probably the biggest shocker of them all. You see, since I had committed my lines of credit and credit card to a settlement program, I could no longer use them.

day 76 - credit cards
Image by JudeanPeoplesFront via Flickr

uh-oh.

I can’t charge anything?

How will I live?

This was a real wake up call. I soon realized that I couldn’t actually afford my lifestyle. The first change I made was to either pay cash or use my debit card for all of my purchases.  This forced me to make hard decisions. If I didn’t have the money in my account, I wouldn’t buy it.
Simple enough………to say that is.  But not that simple to do. I had to undo decades of habitual overspending.
Time to start making choices. So what would I cut out? There were dozens of adjustments I made, but here are a few:

  • No more Starbucks
  • No more impromptu lunches out with friends.
  • Probably don’t need that Netflix subscription.
  • Say goodbye to HBO.
  • Whole Foods is WAY TOO EXPENSIVE and off the hit list.
  • Costco is my friend.
  • Instead of turning on the heat, I put on a sweater.
  • Cancel the cleaning lady and the gardener. Sunday is family cleaning day.
  • Do I really need the extra soft toilet paper?
  • I LOVE generic everything! 🙂

The most interesting by-product of these changes was that I started living more consciously.  Every decision was challenged. A distinction was made between my needs and my wants.
I have a greater appreciation for the thriftiness of my grandparents. I used to make fun of my grandmother for delicately unwrapping presents in hopes of trying to re-use the wrapping paper……well….I still laugh about that one. Some things really are ridiculous!!
Stay tuned. Stay afloat. Wealth and freedom are in your future.
Jonathan
P.S. As an aside, I did keep a few low balance, low interest credit cards out of the program for emergency purposes. I have kids, so I do need a safety net. That said, I made a promise to myself, and my family, that these cards were to be used for emergencies only. No frivolous usage.

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Debt Settlement: a simple truth

If you are new to the blog, click HERE to start at the beginning of my story.

POST #10
Debt settlement presented many challenges.

  • I had to stay focused on my goal.

  • Trust the process.

  • Stop making payments on my credit cards and lines of credit.

Wait….what did I just say? Stop making payments?!!?

STOP MAKING PAYMENTS???

Yes, this is true. The banks won’t consider negotiation if you are making your monthly payments on your loan. What is their incentive? You haven’t proven any need. It seems weird at first, but it makes sense. This process is predicated on need. The clearest way to show the bank that you are experiencing a financial hardship is to stop paying.
Please let me clarify. I am in no way condoning that you stop making payments just because you don’t feel paying your bill anymore. I am saying that if you are in a financial hardship and have decided debt settlement is your best option, the first step you will take is to stop making your monthly payments.
This was VERY hard for me to do.
You see, I never missed a bill, never was late. I was definitely irresponsible with money, but for some reason I thought being late was a real no no. I had no problem borrowing more than I could afford, but dammit if I was going to be late on a payment.
So….in August 2009, I stopped paying the monthly charges for my 3 lines of credit and 1 credit card.

The Cops are Here
Image by hernan.seoane via Flickr

It was a bit scary at first. Yes, the calls started, yes the questions started and I have to admit it was a weird feeling. And by weird, I mean CRAPPY IN EVERY SENSE OF THE WORD. I expected the sky to fall. I expected the cops to show up and haul me off in hand cuffs.
Much to my surprise, none of this happened. In fact, when I called the banks to explain my situation, they were quite sympathetic. I didn’t receive any snarky attitude for the first 30 days of delinquency.
In the coming posts, I’ll discuss how things changed (or didn’t!) as I got more delinquent.
BTW: I constantly stayed in touch with the banks. As a result, they knew I wasn’t on the lamb. This continual communication had a positive impact on my process. Yes, it was difficult to repeat my hardship story over and over. Often it made me feel like a loser. BUT….I knew it was part of the process. I kept my eye on the ball, checked my ego at the door and moved forward.
Stay tuned. Stay afloat. Wealth and freedom are in your future.
Jonathan

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Debt Settlement Companies, Some Incur More Debt

If you are new to the blog, click HERE to start at the beginning of the story.

POST #4
Research! Research! Research!
You will hear me say this dozens of times. As a consumer, it is our responsibility to be educated and informed. The lack of education, laziness, or in my case, DENIAL, gets us in trouble.
I vowed to never again be an uninformed consumer. With that in mind, I put all of my efforts in to finding the best debt settlement options.  I spent 4 weeks and about 40 hours on the phone talking with different companies.
There is a barrage of information out there. Just by typing debt settlement into Google, you will get 8,650,000 results. Click HERE.

Insane. It is daunting to cull through these resources and decipher what the hell they are offering. I took my time to understand my options. My first calls were to the obvious big companies like: Credit Solutions, Ameridebt and CuraDebt.  But I also looked into some of the lesser known companies like Pacific Debt.  Here was the standard offer:

  • I was to deposit $2000/month into an escrow account.
  • The first 6 months of these payments into that escrow account would go towards paying the debt settlement company for their services.
  • I would continue to make $2000 payments for approximately 36 months.
  • As settlement offers came in, they would consult me.
  • The banks would be paid from this settlement account.
  • In 36 months, I would be out of debt.

At first, I was very excited and relieved about a solution to my problem.
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Below are the estimated savings and expenses from 2 of the companies I spoke with. As you can see there is an incredible amount of variance. A lot of that deals with the fees and the length of time you take to settle.

CuraDebt Plan

If they got a 50% savings on my $130,000 of debt, it would take 41 months of $2000/month payments to get out of debt. Total cost including settlements and fees:$81,900.
If they got a 60% savings on my $130,000 of debt, it would take 36 months of $2000/month payments to get out of debt. Total cost including settlements and fees: $71,500.
If they a 75% savings on my $130,000 of debt, it would take 28 months of $2000/month payments to get out of debt. Total cost including settlements and fees: $55,900.

PacificDebt

With $130,000 of debt, it would take 46 months of $2000/month payments to get out of debt. Total cost including settlements and fees: $90,995.
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Pretty interesting stuff, right!?!
After a few days, I saw something that didn’t make sense:

  • Before I would decrease any of my debt, the debt settlement company would increase my debt on average of $12,000 because they get paid first!
  • All of the companies say the bank offers their best deals during the first six months – but according to their suggested schedule, I would have no money left in my escrow account at 6 months because all of that $12,000 would go towards paying the debt settlement company their fees. Which by they way, is for a service they haven’t even performed. Let me repeat this because it is critical.

T

THE BEST OFFERS COME AT THE 6 MONTH MARK.  EVEN THOUGH I WOULD HAVE ACCUMULATED $12,000 IN MY ESCROW ACCOUNT, I WOULDN”™T HAVE ANY MONEY LEFT IN THERE TO PAY THE SETTLEMENT OFFER BECAUSE THAT MONEY ALREADY WENT TO PAY THE DEBT SETTLEMENT COMPANY!!!!

Talk about the contradictions!? In many cases, clients get discouraged at that point. They drop out of the program and declare bankruptcy. These debt settlement companies thrive on our falling out of the program. They are predatory companies much in the same way the credit cards are predatory lenders. Remember what I said about educating myself?  I would not be a victim a second time around.
So let’s review…. this is why most debt settlement companies are scoundrels:

  • I pay the debt settlement company $12,000.
  • In 6 months, the bank makes an offer.
  • Since I have no money in my escrow account, I ask the bank to spread the payments out over the next 6 months so I can have time to accumulate some funds.
  • The bank declines because most of their settlement offers have a 90 day payment time-frame.
  • Threatened by liens and judgments, I drop out of the program and declare bankruptcy.
  • The bank writes off my debt.
  • The debt settlement makes pure profit.

I proposed this contradiction to the reps, but their response was foggy at best. Since I was using the information they gave me to explain this contradiction, they didn’t have an answer that made sense. Instead, they deflected my question by saying they can get a better deal than I can get myself. WHICH IS TOTALLY UNTRUE BY THE WAY!
It became clear that the rep was just a sales person and had no REAL idea about this process. Once enrolled, I would never talk to him again.
As I said before, lets take ownership and take control. I fell into the debt trap, but I was not going to fall into the debt settlement companies’ trap.
Please don’t be so desperate and incur more debt when you are trying to get out of debt. If you take the time to run the numbers, you will see most programs don’t make sense.  An effective debt settlement company will charge a nominal start up fee, base their commission on performance AND take their commission AFTER you have paid the bank. Sound too good to be true? Stay tuned!
In the next post, I will discuss how some debt settlement companies are true consumer advocates.
Stay tuned, stay afloat. WEALTH AND FREEDOM ARE IN YOUR FUTURE!
Jonathan Grossman

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