Like a lot of people, there have been times during my adult years when I have struggled with debt. While I have never resorted taking out a payday loan, or extended loans as is often the case with that racket, I have taken other drastic measures.
Spent Looking For Change | A Look at Debt, PayDay Loans and the Unbanked
Once in my twenties I utilized the services of a pawn broker to help cover a credit card bill and on two occasions, when carrying debt on multiple credit cards began to take its toll, I turned to credit counselors and debt management programs.
While they can vary a little, debt management programs all generally work the same way. The client provides the counselor with all the relevant information on their credit cards (e.g. banks, account numbers, balances, etc.). The counselor works with each creditor to lower the interest rate and/or the amount due. With the agreements in place, the accounts are closed/suspended and the repayment plan is started. The client makes one payment to the credit counseling service, who in turn make the agreed upon [lowered] payments to the creditors, and of course, take a service fee for their efforts.
While the plans can work, obviously it is not a long-term solution. An individual can’t turn to a credit counseling service and a debt management plan every few years after they’ve paid off a set of credit cards and then run up debt on new ones.
Effectively Managing Debt
My experience has led me to conclude there are three elements to effectively managing debt: learn to live on less than you earn, maintain a robust emergency fund, and develop a method for managing credit cards.
The first element is pretty straight forward. We have become a nation of hyper-consumers and too many people spend money they don’t really have, via credit cards, to buy stuff they don’t really need. The solution? Accept that you have to spend less than you earn. Period.
Most are familiar with emergency funds and the role they play. Simply put it is a cash account that is used only in the event of an emergency, to fill critical financial gaps, or meet unexpected expenses (e.g. car repairs, hospital visits, etc.). It is immediate access to cash that allows you to take care of unforeseen circumstances without impacting the money you have committed to saving and investing; and by having such an account, you will not have to turn to credit cards when faced with an unexpected expense, or multiple expenses at once as so is often the case. We all know that bad things happen in threes.
With respect to credit cards, some like Dave Ramsey believe the best way to ‘manage’ credit cards is not to use them. Mr. Ramsey opines, “If you ‘have to’ use plastic, I suggest a debit card. I use them for travel and the occasional convenience of ordering something over the Internet or phone. Other than that, I use cash.”
Not using credit cards at all is certainly a great approach. However, if you’re like me, you maintain at least one credit card. So what’s my approach to managing my credit cards? I employ a two-pronged approach. First, making payments on my credit card – I only use one on a regular basis – is my second most important priority, right behind paying myself (automatic contributions to my Thrift Savings Plan and brokerage accounts) first. Second, I pay off the balance twice each month, on the 5th and 20th. I simply open up the applicable app on those days and clear the balance.
There was a time when I would pay off the balance at the beginning of each month. What I found however, is that inevitably various factors would conspire against me and I would not pay off the entire balance one month. And of course that would make it harder to pay off the entire balance the next month … a dangerous snowball would form. By paying off the balance twice each month I don’t give that snowball a chance to form.