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How I moved a mountain of debt

November 03, 2011

By Karen Haywood Queen | Money Rates Columnist

After three cross-country moves in 18 months, Jill B. and her family found themselves with $100,000 in credit card debt.

A spending spree after the purchase of a new home left Lorie Semien beneath $60,000 in credit card bills.

For many facing that much debt, the next stop would be bankruptcy court. But these women, each in their early 50s, managed to pay down their debt and establish habits that have since kept them on track financially.

Here's how they each flattened their mountain of debt.

Confronting the unexpected

In the summer of 2001, Jill B. and her family were financially fit. She had a job. He had several job offers. They had a few credit cards, but didn't owe more than $500 on any of them.

That's when the trouble began.

In the span of three years, Jill's family moved across the country three times, weathered several stretches of unemployment and underemployment, added a son, and paid $7,000 for a new wheelchair for their disabled daughter.

Their lifestyle also included shopping at high-end department stores and $100 restaurant meals with wine.

"We were accustomed to having our own homes and working for that," Jill says (she asked that their last name not be used because of her husband's job.) "With cross-country moves, we were paying a house payment and a rental payment. We weren't accustomed to having so many things happen at once. Everything started to mount."

Since they were both employed and never missed payments, credit card offers rolled in even as their debt added up.

"We always paid more than what was due," Jill says. "And then we'd get a new credit card and I'd call to check the balance and say, 'Oh, I have this much I can spend.' Everything was great and so the card companies kept increasing our credit."

Soon they were paying several thousand dollars a month to a dozen credit cards, some with interest rates as high as 26 percent. She considered filing for bankruptcy, but her husband worried about the impact on his career.

Instead, they entered a credit counseling program, which negotiated lower interest rates on their debt and set up a twice-monthly payment plan with money going to each creditor. The family began paying $2,000 a month in late 2004 and will have paid off their debt by the end of 2011 or early 2012, Jill says.

Drastic and creative cuts

Here are a few of the ways Jill's family cut expenses to eliminate their debt.

  • They slashed spending on groceries and meals out by as much as two-thirds--from $1,000 a month to $300-$400 a month. Instead of eating out three or four times a week, they now eat out at what Jill calls "cheapy restaurants" once every two or three weeks. Switching from high-end specialty grocery stores to lower-cost supermarkets and planting a garden also helped their bottom line.
  • They found cheap or free recreation such as disc golf, riding bikes and camping to replace more expensive hobbies.
  • When their car was totaled, Jill shopped around until she found the car she wanted for $4,000 less than she was originally quoted.
  • When their carpet became unbearably worn and stained, Jill ripped it up but didn't replace it. Instead, she painted the concrete slab underneath.
  • When they needed a new washer, Jill called friends who worked at home improvement stores and said she was looking for a washer that was drastically reduced or even a return. She got a $900 Whirlpool washer for $274.
  • They refinanced their house with the same lender, reducing their interest rate by about three percentage points to the 3 percent range.
  • She asked their families to eliminate the gift exchange for adults at Christmas, leaving only the children to buy for.
  • They kept one or two credit cards for emergencies. But those cards have low limits--just $500.

Now that they've nearly paid off the debt, Jill is considering new carpet and other home improvements. But first, the family plans to save $10,000 for emergencies.

"We used to think, 'We need enough savings if one bad thing happens,'" Jill says. "Now the goal is to have enough if a bunch of bad things happen at once."

Credit card newbie goes wild

In 2001, Lorie Semien had no credit cards, no debt and lived with her mother. She works as a self-employed tax accountant and serves in the Air Force Reserve.

Life changed when she fell in love and her fiance bought a house. "He felt like I should put my share into moving into a home," she says. That's when she got her first credit card.

She soon bought furniture, a $12,000 riding lawnmower and more--all on plastic.

"It just went out of control," she says. "Every time I would pay off a credit card balance, I would go right back to spending. It wouldn't help when the companies would say 'You don't have to pay any interest for six months.'"

By 2008, Semien had $60,000 in credit card debt and was paying $300 a month just to meet the minimum monthly payments. She came clean to her fiance and, like Jill B., entered a credit counseling program.

Goodbye, cards

Semien's fiance told her to focus nearly all her income on paying down the debt. Earlier this year, she was deployed, which boosted her income and reduced her bills--freeing more money to reduce debt. She completed a five-year repayment plan in less than four years by paying $1,000 a month.

In addition to allotting nearly all of her income to debt repayment, her other strategy was to give up credit cards cold-turkey.

"I cut up all my credit cards," she says. "It's something I will never touch, not ever. It's like people say, 'I'll have this one drink.' That's how I felt--it was an addiction."

The expert's take

Richard Barrington, CFA, senior financial analyst at MoneyRates.com, praised each family for being willing to make big sacrifices to eliminate debt.

"Both approaches are designed to take a serious bite out of debt rather than just nibble around the edges," Barrington says.

Barrington labeled Semien's approach an income-based solution and Jill's approach as a spending-based solution — both valid strategies, he says.

Not everyone will have a supportive partner and be able to put nearly all income toward debt reduction as Semien did, Barrington says. "But anyone should look at devoting at least a portion of income to paying down debt," he says.

Also, Semien's fiancé is being smart as well as generous. "Having his wife wipe her debt slate clean will benefit their finances as a married couple," Barrington says.

Jill B's solution to make serious cuts in spending habits is also a good strategy, Barrington says.

Breaking the cycle

As a whole, Americans are succeeding in reducing debt. The proportion of household income to debt peaked in 2007, right before the economy tanked, but now has dropped to its lowest level since 1994.

Still, some consumers are bound to find themselves beneath their own mountains of debt. But while recovery strategies may vary, the successful ones will almost always feature two things: careful planning and dedicated execution.

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