Debt piles up too easily
By Deborah Adamson
Advertiser Staff Writer
The holiday gift-giving season is officially over. But for shopaholics, there's another excuse to whip out their credit cards: after-Christmas sales.
For credit-union members: "Surviving Financially in Paradise" Call the Hawai'i Credit Union League at 941-0556. For the general public: "Spend Less to be Debt Less" Call the Hawai'i State Federal Credit Union at 587-2700. "MoneyEd" Free online course from the University of Hawai'i at Manoa.
That Guess purse you've eyed for weeks? It's discounted by 30 percent. Now you need matching shoes — how about hitting Macy's sales? After all, another $200 on your credit card won't make much of a difference, right?
Free classes on managing your money
If you're up to your neck in debt, stifle that urge to splurge.
"I want, I want, I want is kind of our culture," said Karen Ho, financial educator at the Hawai'i State Federal Credit Union. "Every time you take your credit card out, you're putting yourself into long-term debt."
The average American carries $2,627 in credit card debt, up 14.5 percent from a year ago, according to the annual Credit Card Survey by Myvesta, a nonprofit consumer education group in Rockville, Md.
The easy availability of credit has changed the way Americans view affordability.
"The word 'afford' in our culture has become very dubious," said Ron Wall, family economics specialist at the University of Hawai'i at Manoa and author of "You & Your Money." "Do you mean afford with plastic?"
A lax attitude toward debt is what dooms many consumers. It doesn't have to take a major purchase or catastrophe to put you under water. It's spending a little bit more here and there. Like gaining weight, it takes months of "just one more bite" to pile on 20 pounds.
Paying just the monthly minimum prolongs your problem. Let's say you owe $475 on a credit card charging a 19.9 percent interest rate. You don't buy anything else and you make the $10 minimum payment. It will take nearly eight years to pay off your debt at a total cost of $942.
Moreover, managing debt isn't just for people who are on the brink of bankruptcy. It's also for those who jeopardize their future by not paying off debt.
"We're picking up debt at a much younger age than ever before and we're living longer," Ho said. "If they do that now, they won't be able to take care of themselves later on. They can't have the house they want, they can't have the car they want, they can't have the retirement they want."
That's why 21-year-old Tanya Ruiz of 'Ewa Beach and Joseph Tripp, 20, of Salt Lake don't use credit cards. Even though Ruiz said she splurged over the holidays, she avoided debt by only using her debit card, which pays for purchases directly from her bank account. Tripp doesn't even own a credit card.
Unusual for someone his age? "I call it being smart," he said.
But they're the exception. For many people, racking up credit card debt is a way of life.
Signs you're in the danger zone: You live paycheck to paycheck, you don't have much savings, you're maxing out your credit cards, you use one card to pay off another, you only make minimum payments on your monthly charges or your credit card debt exceeds 20 percent of your take home pay, said Bob Jonick, who teaches money management classes at the Hawai'i Credit Union League.
If you think filing personal bankruptcy will solve all your problems, guess again.
Some debts don't disappear with bankruptcy, such as student loans, alimony and child support, and certain tax liens, said Dawn Smith, a personal bankruptcy attorney in Honolulu. The bankruptcy court, credit card companies and the U.S. Department of Justice also might challenge major purchases or cash advances if they suspect you're trying to take advantage of the system.
Moreover, they can seize your house to pay your debts, Smith said.
On top of that, your bankruptcy stays on your credit record for 10 years. You'll still be able to get a loan, but you'll have to pay a higher interest rate.
"A much better alternative is to face the monster of debt and attack it. Most situations are not hopeless," said Mary Hunt, author of "Debt Proof Living" and the self-described editor-in-cheap of Cheapskate Monthly in Paramount, Calif.
The first thing to do: don't make your situation worse.
Be wary of payday lenders, said Juanita McKeown, financial readiness program manager at Schofield Barracks. These lenders give you a cash advance in anticipation of your next paycheck. But the fees are steep. It's not unusual to pay annual percentage rates of 300 to 650 percent, she said.
For example, if you write them a post-dated check for $120 to get $100 in cash to tide you over before your next payday in two weeks, that's an APR of 521 percent for a 14-day advance.
The problem for spenders is they'll use up the cash but be short on their next payday. So they'll go back to the lender and the cycle continues.
"Eventually, it's going to catch up to you," McKeown said.
Another business to scrutinize is credit counseling agencies, especially if they aggressively market to you.
While there are reputable counselors, there are many dishonest or incompetent firms, bankruptcy attorney Smith said.
A credit counseling agency would negotiate a payment plan with your lenders, perhaps even getting them to lower your interest rate. You pay the agency and they pay the lenders. But Smith said she's come across many people who paid the credit counselor but the money never reaches the lenders.
So choose an agency that's a member of National Foundation for Credit Counseling (www.debtadvice.org or 800 388-2227), according to Bankrate.com. Find one that's free or charges a minimal fee. Currently, the only Hawai'i member is CCCS of Hawaii in Honolulu, Hilo and Wailuku. It charges $10 a month.
Take note that seeing a credit counselor may affect your credit report.
Alternatively, try negotiating with the credit card company yourself, said Tracey Mills, a spokeswoman for the American Bankers Association. Ask if they can set up a payment plan for you. Preferably, contact them before your account is 60 days past due, although it's never too late to try.
"Oftentimes, they will work with the consumer," she said. "If they have to come after you, it's going to be more expensive."
To learn more about managing money, sign up for free community or online classes.
Credit union members can attend "Surviving Financially in Paradise" by calling 941-0556. The "Spend Less to be Debt Less" class by the Hawaii State Federal Credit Union is open to anyone. Call 587-2700. UH has a free online course, MoneyEd (www.ctahr.hawaii.edu/moneyed).
You can do it yourself too. All it takes is some organization and flexibility.
Step 1: Immediately stop charging on your cards.
Step 2: List all your credit cards, amounts owed and APRs charged.
Step 3: Set detailed but realistic goals, such as you want to be debt-free in a year. Commit to setting aside a specific amount to pay down debt.
Step 4: Pay off the credit card with the highest interest rate first. Don't just pay the monthly minimum but apply any extra money toward it. After it's paid off, use that monthly payment and apply it to the card with the next highest APR. Go down the line until you're free of debt.
Alternatively, you could consolidate your loans into the lowest-APR credit card for which you can qualify. To shop for rates, go to www.bankrate.com.
You also could take out a home equity loan to pay off your credit card bills. The interest is tax deductible and rates are lower. However, you risk losing your house if you become delinquent. Also, having zero balances on your cards might tempt you to spend again — landing you in the same trouble.
To stay free of debt, it's important to change your lifestyle. Don't worry — there are ways to cut back without living like a monk.
First, look at lowering costs on your major expenses — such as refinancing your home or car loan, increasing your deductibles for auto and homeowners insurance or switching to less expensive carriers, buying term life insurance instead of cash value policies and shopping around for home appliances.
Next, tackle the little expenses, too, because they will add up to a small fortune over time.
If you go out to lunch five days a week and spend an average of $7 each time, that's $1,820 a year. Try going out twice weekly and bag a lunch the rest of the time — you may want to form a potluck group at work — and you'll save $1,092 a year.
Your daily soda from the machine at work is $1 a day or $260 a year. If you bring your own soda at 20 cents each, you'll save $208 a year.
Going to the movies every Saturday night will cost nearly $18 just for tickets for two, or $936 a year. If you go to the matinee at $13 for two tickets, you'll save $260 a year. Better yet, alternate going to the theatre one weekend and renting movies the next. You'll save $468 a year.
Modifying just those three habits, which won't hurt your lifestyle too much, will save you $1,560 or $1,768 a year. That's $130 to $150 a month.
Other easy changes to consider:
• Brew your own coffee instead of buying
• Eat lunch out with the family, instead of dinner
• Throw extra change into a jar and bank it
• Recycle soda cans or bottles and collect 5 cents each
• For your birthday or Christmas, ask for gift certificates to places where you shop
• Avoid late charges by paying bills on time
• Avoid ATM fees by using your bank's machines or get cash back when you use your debit card
• Look for free checking accounts with no minimum balance required
• Use a phone card for long-distance calls
• Stay within your cell phone minutes; try to make your calls when you're not charged for airtime
• Switch to a lower-rate credit card, with no yearly fee
• Shop for groceries with a list to avoid impulse buys
• Buy generic drugs or use mail order pharmacies, which may be cheaper
• Always send in for a rebate. Every dollar adds up.
• Shop for presents when there's a sale. Don't wait until the last minute.
Saving money doesn't have to be difficult and at the end, there's a big payoff.
"There's peace of mind and less stress," Hawai'i State Federal Credit Union's Ho said.
And that, as MasterCard tells us, is priceless.
Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
