FEBRUARY 23, 2006

Five for the Money

By Sonja Ryst

Breaking the Cycle of Bad Credit

Despite the national trend of increasing debt load, young adults can control their credit-card spending with some simple steps

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Kristy Wilson and her husband had a nagging feeling that their spending might have spiraled out of control. They had needed new furniture when they moved to Charlotte, N.C., from Dallas in 2001. They knew they had already accumulated thousands of dollars in credit-card debt over the years, buying everything from necessities for college to nice clothes for work. When they finally sat down to look at their finances, they realized they'd racked up $30,000 in credit-card debt.

"It was an eye-opener," says Wilson, a BlueCurrent Public Relations spokeswoman who is in her early 30s. She and her husband had hoped to buy a house, and now they wondered how.

Wilson and her husband aren't the only young adults whose debt has daunted them in recent years. The average credit-card debt among 25- to 34-year-olds was $5,200 in 2004, 98% higher than in 1992, according to Maryland-based payment-cards research firm CardWeb.com (see BW, 11/14/05, "Thirty and Broke: The Real Price of a College Education Today" and BW, 02/06/06, "Up Against It at 25").

How has the debt load expanded? The government has withdrawn financial aid for student loans (see BW, 1/30/06, "Student Loans: Outflank the Hikes Ahead"). College tuition remains expensive, while lenders are marketing aggressively to young consumers to boost their business. These and other factors have made it normal for young people to graduate with credit-card and loan burdens, says Carmen Wong Ulrich, who wrote Gener@tion Debt: Take Control of Your Money -- A How-To Guide.

Credit-card debt differs from student loans in that it tends to go up after graduation, instead of shrinking. "Credit cards for young people are being used instead of cash. They charge everything from cell phones to pizza," Wong Ulrich says.

With revolving debt, interest piles up on the credit balance, while student loans are level amortizing, with principal paid down each month. Those credit cards come with high rates -- and fees -- attached. The average standard fixed rate on credit cards amounts to nearly 13%, while a 30-year fixed-rate mortgage costs only 6.37%, according to Bankrate.com's weekly survey conducted Feb. 15.

For many in the 25-to-35 age group, credit-card debt can seem insurmountable. But don't despair. This Five for the Money offers some strategies to help ease the burden.

1. Assess the Situation
Before you can start cutting your debt, you need to itemize all your financial obligations to understand what's going where, says Robert D. Manning, a professor of finance at the Rochester Institute of Technology in Rochester, N.Y. "Once people start doing that, it's like being on a diet and counting calories," he says.

Manning has a Debt-Zapper Calculator tool on his Web site, which helps you compare the costs on your credit cards. You can also find tools for understanding debt at the online rate data research firm Bankrate.com. They'll help you figure out everything from your credit score to how to budget your credit-card payments.

2. Play Hardball
You have a bargaining chip: Your creditors want their money back, and they may be more flexible than you think.

Gener@tion Debt writer Wong Ulrich recommends that you call your credit-card company before it starts sending you late-payment notices. Explain what you can afford, and see if you can negotiate a modified payment plan. "A lot of times they're willing to work with you, especially if you explain that it's temporary," Wong Ulrich says.

And for those irked by having to pay for the privilege of carrying plastic, Credit Card Nation writer Manning says that you can sometimes persuade credit-card companies to waive their annual fees, simply by calling them and threatening to close your account.

3. Get Good Information
If you decide you can't manage your credit-card burden alone, be careful about where you get advice. For a list of organizations approved by the government, click here. Your local state attorney general, Better Business Bureau, or consumer-protection agency might also have information about resources in your neighborhood. University credit unions are another possible resource.

Some nonprofits may be less charitable than they appear. For example, the Federal Trade Commission in January settled a case it had brought in 2003 against Andris Pukke, founder of AmeriDebt and owner of the related company DebtWorks. The FTC charged that Pukke misrepresented AmeriDebt as a nonprofit organization that could help you get out of debt without an up-front fee. Instead, AmeriDebt had funneled profits to DebtWorks and Andris Pukke, the agency alleged.

4. Lose the Expensive Debt
Keep paying your minimums on all your cards, but focus your buying power on getting rid of one creditor at a time, starting with the card that's charging you the highest rates. If you have $100 of credit-card debt with a finance charge of 5.9%, it will really cost you $112.51 after four years. For the same debt with a 33% finance charge, you'll end up forking over $181.33.

Credit-card companies sometimes promise lower introductory finance charges to people who switch. "Some of those offers are good, but you have to pay attention," says Sheila Adkins, spokeswoman for the Council of Better Business Bureaus.

The cards often come with stipulations and fees. CreditCards.com, for example, on Feb. 23 presented the Chase Cash Plus Rewards Visa Card (Cash Back Credit Card) as a top pick among its list of available balance transfer credit cards. The blurb describing the card announces a 0% Introductory Annual Percentage Rate (APR) for up to 12 months. You have to click through two Web site pages to find the actual terms, and even then you might need to call a customer-service rep to understand the jargon. While you can transfer your debt balance on higher interest rate cards to the zero-percent Chase Card, it costs up to $75 each time you do it. If you're late on one of your monthly payments to Chase, your zero-percent interest rate can soar to 23.99% plus the prime rate (currently 7.5%) that the Federal Reserve charges banks for their debts.

5. Knuckle Down
Kristy Wilson succeeded in transferring higher interest rate credit debt to more affordable cards while she and her husband were grappling with their $30,000 burden. They knew that the introductory zero-percent rate on one of their cards only lasted for six months, so they kept close track of its expiration date. As a result, they managed to save hundreds of dollars without getting suckered into paying higher charges.

They did another little thing: the magic secret.

"We just spent less," Wilson says. "That was a key part of it." When Wilson and her husband itemized their expenses, they saw that much of their money was going toward things like restaurant dinners and movie tickets. They were blowing more on entertainment than rent. After carefully budgeting their income and expenses, Wilson and her husband decided they could afford $100 per week.

They put the cash in an envelope and used it for anything that wasn't a necessity, even a few dollars worth of video rentals. When that money got used up, they'd stop spending to go out. Sometimes they would use most of the cash all at once for a splurge that month, and other times they'd use it in small amounts along the way. "We found it was still fine," Wilson says. "We didn't have to go to a fancy restaurant to have a good time."

After making that sacrifice, they paid $2,000 every month toward their credit-card debt. They started out with several cards in 2001 and, by paying them off and consolidating them onto lower interest rate cards, worked it down to two. Only a couple years later in 2003, they had managed to pay off the entire burden.

She and her husband soon bought a three-bedroom stucco town home that's only 10 minutes away from downtown Charlotte. Now they can afford to have a "money date" every week, Wilson says. They only use one credit card, and pay it off at the end of every month.

"It was hard," Wilson says. "It was scary to face it." But she says that struggling through the debts brought them closer as a couple. "We were in it together."

This story ran on on February 23, 2006.