1/8/2013 7:00 PM ET|
How 4 families solved credit woes
It's easy to get in over your head with debt. These 4 success stories prove that smart counseling, a budget and discipline can help you dig out.
Molly Stillman, 27, will never forget how financial panic feels. "Your chest starts to feel hot, your heart's pounding, you get dizzy and nauseous," she says, recalling her realization in 2008 that she owed more than $36,000 on her credit cards. Today, the marketing director from Hillsborough, N.C., is free and clear, and she vows, "I'll never be in debt again."
That's a promise more Americans have been making these days, since the financial crisis and recession shook their sense of well-being. A Federal Reserve Board report issued in June 2012 revealed that only about 39% of cardholders carried a balance in 2010, down from 46% in 2007. Those balances averaged $2,600, compared with $3,100 three years earlier. In part, that's a reflection of banks' stingier credit policies, but it's also the result of a mass awakening among consumers to the fact that paying off debt is one of the only surefire ways to increase disposable income. That's especially true when it comes to credit card debt, often the first recourse for savings-challenged families without much home equity, since it often carries cripplingly high or variable interest rates.
"People forget that when they charge something on a credit card, they're essentially decreasing their future income, because they're committing those earnings in advance," says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling, a network of more than 700 nonprofit credit counseling agencies that help consumers manage their debt, often by negotiating lower rates from the lenders. "The recession's silver lining," says Cunningham, is that many people have "changed their ways." Meet four reformed families:
Christina and Jim Harris
- Anchorage, Alaska
- Debt: $66,000
For years, Christina and Jim Harris enjoyed a picture-perfect life. Jim's remodeling business brought in about $100,000 a year; Christina, 36, managed the company and raised their three kids, now 8, 12 and 15. Then, the recession began. It was "like falling off a cliff," Christina recalls. "Our income basically dropped by half, but we didn't cut back on expenses." By August 2008, their credit card debt stood at more than $50,000, and they found they could no longer make the minimum payments. Some people recommended bankruptcy, recalls Jim, 38, but "we decided we should pay the money back. We're not deadbeats."
"Nobody forced me to buy that $600 Coach bag," Christina says.
The credit counseling service Christina consulted got the couple's lenders to drop rates from as high as 32% to as low as 7%. The couple agreed to make one consolidated payment of $1,400 a month to the agency for four years, which the agency would then dole out to the banks.
Their spending screeched to a halt. "The year before, my kids were in all name-brand clothes," says Christina. Afterward, they were limited to one pair of designer jeans each, from eBay or a thrift store. The family did away with cable and Internet. They slashed energy bills by 20% by weatherizing doors and windows and installing programmable thermostats and energy-efficient bulbs. Instead of buying a new clothes dryer for $1,200, they found the same model used for $200. They shaved $500 off their "over-the-top" holiday gift budget. Later, when they felt they could again splurge on a treat, Jim remodeled a friend's kitchen in return for frequent flyer miles to Hawaii.
Meanwhile, Christina upped the family cash flow by heading back into the workforce after six years at home. Lacking a college degree and recent experience, she took the first job she was offered, collecting bills for a doctor's office.
"I hated it," she says. She found the job so stressful that she broke out in hives at weekly staff meetings. The $37,500 salary hardly seemed worth it, given that day care cost $900 a month, and insurance took nearly $400 more. She also felt disconnected from her kids, especially one January night in 2009 when the day care's teachers refused to let her son leave with her. "Jim always picked Cole up, so the staff didn't know me," she says. Soon after, she quit.
A few months later, when Cole started kindergarten, Christina tackled the job market again, this time more strategically. "I spent six hours a day researching employers. I wanted to find a company that treated people well," she says. To test the waters, she took a temp job doing accounts payable with a construction company. It soon turned into a full-time job managing payroll, and before long her pay rose to $45,000. "But there were no women in any power positions," she says. So in late 2011, she took a position as a project administrator overseeing regulatory compliance for another large construction firm. Her current income is "a significant increase."
In September, the Harrises made their final payment, for a grand total of $66,376.07. Along the way, they established a new dynamic. "I've stopped thinking it's Jim's responsibility to support the whole family. It's mine, too, and I relish it," Christina says. By way of celebration, "I bought a Coach bag," she says. "But instead of paying $400, I got it used on eBay for $75."
- Debt: $36,000
When Tom Sparks, 57, ended up with sole custody of his three girls after a divorce in 2002, it quickly became clear that his $30,000 income as a manager of a mattress store wouldn't sustain their lifestyle in Minnetonka, Minn., a suburb of Minneapolis. They left their 2,800-square-foot house for an apartment in the same school district. But his financial struggles worsened when one daughter developed chronic health problems requiring hospitalization that was not entirely covered by his insurance. He realized he would need a second job. "I tried various work-at-home schemes," he says, "but none of them turned out to be legitimate." He considered night jobs at retailers, but the hours wouldn't let him see his daughters.
The solution: a paper route, which added about $400 a month to his income. For five years, Sparks got up most days at 1:45 a.m., delivered papers and went back to bed at 6:00 a.m. "Then, I'd get up at 7 or 7:30 when the girls got up. I'd shower, shave, and have breakfast as if it were all a bad dream," he says.
Still, ends didn't meet. He had to tell one of his daughters that she couldn't try out for the competitive cheer squad, because participation would cost close to $2,000 a year. Instead, she and her sisters took jobs at a local malt shop, for pocket money and to save for their own cars, gas and insurance.
He was managing to pay all his bills on time, but then one card's rate moved from 9.9% to 12.9%. Another card went to a variable rate. "That was the last straw," he says. "That's when I knew I was in trouble." With $36,000 outstanding, he sought help from Lutheran Social Services Financial Counseling, which helped hammer out a five-year plan with monthly payments of $633 and a rate of just 1.75% on some of his debt. He also worked out an arrangement with the hospital where his daughter had been treated. Meanwhile, the girls were getting ready to leave home. Two went to college, funded primarily by scholarships and financial aid, and the third took classes to become a certified nursing assistant. As soon as they left, Sparks canceled his cable and Internet service.
Then he made a move that might seem counterintuitive for someone digging out of debt: He took out a mortgage. "The housing market had plunged in Minneapolis and the economic stimulus package was offering incentives to homebuyers," he says. He left his $1,200-a-month apartment in Minnetonka for a $53,900 two-bedroom townhouse and now pays just $400 a month for his housing. Sparks says he's on track to be free of credit card debt by 2015.
More from U.S. News & World Report:
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- How to convince a prospective employer to overlook poor credit
Kandy and Russell Hildebrandt
- New Richmond, Wis.
- Debt: $123,000
Russell Hildebrandt, 50, made a promise to his wife before the birth of their twin daughters. "I told her if she wanted to be a stay-at-home mother, I would do whatever it took to make that possible," he said. The twins are now 17, and he's honored that promise, even though it has meant working nights -- and sometimes sleeping in his car to avoid commuting -- to pay off $123,000 in personal-loan and credit card debt.
"Our mistake was that we never cut back on expenses or replaced my income after I left my job," says Kandy, 46. Russell's income, then $71,000, wasn't enough to compensate, and one day in 2004, Kandy was shocked to realize that the monthly finance charges alone on their 11 cards added up to $1,500 a month.
To come up with the $2,300 payment they calculated they would need to get out from under in five years, Kandy offered to get a job -- three times. But "I'd made a promise," says Russell. "I was going to get us out of this debt or die trying."
Already working 60 hours a week as a manager at an environmental testing firm in Minneapolis, 50 miles away, he added a night job as a janitor at a grocery store. By working midnight to 4:30 a.m., he added $800 a month to their income. "During the day, he was a professional. Nobody knew that at night he mopped floors and scrubbed toilets," Kandy says. Sometimes he'd doze off at work; his co-workers were occasionally startled when Russell's head loudly hit the desk. To save on gas the days he didn't work the second job, he would sometimes stay in Minneapolis and sleep in his car.
At home, Kandy stopped buying clothes and cut out fresh foods. Three times a week, she tapped a vast store of defective dehydrated potatoes available to a relative ("our manna from heaven"), originally meant for a restaurant. "I'd use it in soups, casseroles, mixed with eggs for breakfast," she says.
Halfway to home plate, fate threw the Hildebrandts a curveball: Kandy became pregnant with their son Joey, who was born in 2006. "You'd think a baby's the last thing you'd need when you're paying off debt, but he was exactly what our family needed," she says. "He brought a lot of joy and humor into the house."
Driving back from work one day, Russell spotted a for-sale sign on a house with a lovely garden that was almost three times the size of their rented townhome. Although Kandy had her doubts, they went to an open house and met the real estate agent. A few months later, the agent called with the offer of a rent-to-own agreement. The family would pay about $1,000 a month -- $200 more than their current rent -- but 20% of it would go into escrow for a down payment.
In January 2009, just a few months before making their final credit card payment, they moved into the house, which they now own. "One great thing about paying off debt instead of declaring bankruptcy is that it let us save our credit rating," says Kandy. "So we could buy the house with a loan at 5%."
Another benefit: They've permanently changed their spending habits and, with Russell now earning $81,000 at his one main job and contributing to a 401k plan, the family's financial future looks brighter. Still, Kandy keeps an unopened box of dehydrated potatoes tucked away "to remind us where we've been."
- Hillsborough, N.C.
- Debt: $36,000
By December 2010, Molly Buckley was sure she'd found The One. She'd been dating her friend and co-worker, John Stillman, for about six months. She knew he felt the same about her, but she had a terrible secret. "I had this enormous credit card debt I was paying off, and I didn't want to tell him," she says. "Some guys would go running."
Finally, she found the nerve to come clean. During college, she'd charged $36,000. Although she'd spent the ensuing two-and-a-half years chipping the balance down to $12,598, she struggled to make payments.
John didn't run. "She made bad decisions and bounced back from them," he says. "That was one of the things that made me realize she was the marrying type."
Although Molly hadn't had to shoulder her college tuition, she'd put all her living expenses on credit cards, including books, food and clothes -- and a $1,700 pink Fendi hobo bag. "It was the combination of financial need and some big mistakes like that which got me into trouble," she says.
She assumed she'd be able to pay the bills when she got a job in 2007. But her $30,000 annual salary as a high school English teacher barely covered rent and expenses, and she continued to run up debt on six credit cards. When she couldn't make even the minimum payments, "I had a complete breakdown in my room," she says. She called one of her banks, crying, and was transferred to a credit counseling agency called Novadebt. The organization helped her work out a single payment of $806 a month for five years.
That commitment would leave almost nothing after rent and utilities. Once a month, Molly stood in line at a food bank for a box of groceries, which she transferred into bags so her roommates would think she'd been to the store. She befriended the cafeteria staff at school and brought home leftover subs and pizza. When she moved to be near family in 2010, she took four part-time jobs (at a restaurant, an art gallery, a clothing store and in marketing at a radio station), and worked as a freelance social-media marketing consultant. Soon, the radio job became a full-time gig, providing about $27,000 a year -- and her future husband.
John drew up a spreadsheet to help Molly track expenses and do a better job of planning. "I learned that I'm in charge of my spending at the beginning of the month. I can make a plan for where every dollar goes. But once the plan is set, the budget controls my spending," she says. The two married in February, after saving $5,000 each to host 220 guests. Her sister made the cake; a friend catered the meal; their Mexican honeymoon was a $700 (plus airfare) deal from the bargain site Living Social. Now debt-free, Molly is saving for a new car, and she boasts that she'll buy it with cash.
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Key point being made is there is a way out... if you want to. For many, they end up giving up and going Bankrupt. For some, too many lunches at your favorite fast food is just as costly (percentage-wise) as that fancy hand bag. It does not matter what you make as much as it does your current habits.
Other key point is using the "non" profit organization as mentioned in the article. Many of these companies are supported by the larger credit organizations. Credit card companies are more willing to accept reduced rates and payment arrangements from these companies (not to be confused with the "for" profit ones you see on TV. In the 80's it was difficult to ask banks to reduce card rates below their actual cost of funds. Big difference today when the cost of funds are at their lowest!
Consumer Credit Counselors is not for everyone. If you don't have a job or source of income, the math won't work for you and that other route may be your only option.
Kris & Cutis have posted the exact same messages several times.
I'm guessing spam.
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