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Author: reverbbrad Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308568  
Subject: A Debt Story (very long) Date: 8/20/2002 1:07 PM
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Because folks have asked, this is my long and painful journey into, and out of, debt.

Act I: Falling

This all, of course, begins with how I got into debt, of course. I guess that part of the story begins with college. When I left for college, I had no debt. I was extremely fortunate to have a parent that had planned for the expense of my education, so I didn't rack up major student loans. I worked part time as well, as a bartender, to cover most of my living expenses. However, a few things happened:

1) It took me a while to realize that I couldn't/shouldn't continue to live in the comfy middle-class lifestyle that I grew up in. I'm not sure why it took me so long to figure this out... it isn't like I wasn't working and didn't "know the value of money." I guess I was just used to being able to buy this cd, or that shirt, and never have to worry too much about whether I could afford it. I think I also believed that I'd find a decent job after college, and would be able to pay it all off.

2) I started a record label with a friend of mine, while still in college. Yep, that old story... we financed a bunch of it through credit cards. Actually, the label turned out some good music (not that I am biased), and we even had a couple cd's go profitable. Not nearly enough to cover the losses of starting up, and our first few ill-planned releases.

3) When I graduated college, I floundered for about two years. I went back to bartending a bit, I worked in a coffee shop (no, not that one), did the third shift in Kinko's, worked at a day care (a job I loved). The damage, largely, was done during this time. I am not sure of the exact number (that sort of organization would come later), but I was over 20k in debt at this point.

Act II: Standing

After two years of slacking, I finally needed a real job. I had done some web design/coding for my own business, and this was the mid/late 90's. I cut my teeth at an Association for 6 months earning very low pay. After that, I was able to find a job fairly quickly.

Unfortunately, the job I found had a long commute. That meant buying a car (I had managed to live without for a while after my used car kicked off). I decided to buy a new car, since my luck with used cars had been attrocious. I wanted something reliable, but not budget busting, in case my new job didn't pan out (this may have been my first really smart decision). I went with a Honda civic. I even got decent financing at 4.9%/60 months. Still, this added about 12k to my debt load, bringing it into the low-mid 30's. Embarrassing note: I am not sure what my high-water mark was. I don't even think I want to go back and look. When I started keeping count, it was 32k, although I had been working on it for a little while by then.

The good news was that I finally had a job that paid higher than minimum wage. The bad news was that I was still learning to LBMM. I probably spent another 6-8 months at "break-even". I wasn't really adding to my debt, but it wasn't decreasing, either. I did start giving to a 401k, so things were looking up a little. There was always some expense that I hadn't counted on, or some frivolity that caught my eye. Also, around this time, I moved in with my DW (then, my fiance).

Act III: Climbing
This is the one you've been waiting for, that might have some actual helpful info...

I am not sure how or why the lightbulb went on, but it finally did. I started making real progress b/c of four things.

1) The Rate Game. I read a bunch of finance books (including one of the Fool books). I learned that I could call and reduce my interest rates. I started playing that game, and it worked. I don't know if I read about the snowball method, or it was just the way I began approaching it, but I really started zeroing in on my balances, particularly my high-rate balances.

I was in good shape b/c even though I had let my debt escalate, I had always managed to make my minimums (and not much more). To the CC's, I must have looked like an endless stream of money; not defaulting, not decreasing my debt. As rotten as this felt, it conveyed one advantage: they were willing to compete to keep my business.

Specifically:
a) Citibank. They lowered my rate some, just for asking (from 18.9 to 14.9). After that, I asked if they would lower my rate further if I was willing to pay an annual fee. They did. For a modest fee (I think it was $15), they lowered me down further to 11.9. Since I had, uh, several thousand on my card with them, this meant hundreds more dollars in interest savings. To this day, Citibank has been one of my most "helpful" creditors.

b) Discover. Nothing, nada. They weren't even willing to discuss a lower rate. Not the first guy, not his manager. They became the card in the crosshairs.

c) USAA. They too reduced my rate, but only after I offered to pay a fee ($45). Once I made that offer, though, they took several points off. At the time, I think that rate became 9.5. when interest rates went down, my rate went down as well.

I still have this card, and it currently holds a rate of 7%.

d) Car loan: Nothing I could do. The rate wasn't horrible, so I just left this alone.

I got an offer from Fleet for a BT. They based their rate on LIBOR, and at the time it was around 10%. I transferred my Discover debt over to them. While it was a good decision at the time, Fleet was evil to me. I would not recommend them to anyone. However, it made Citibank my prime target. I transferred as much as I could off of Citibank to USAA and Fleet.

By the time I managed to get my Citibank balance down to about $500, they made me a BT offer I couldn't refuse: 3.9% for the life of the loan. They increased my limit, too, to 12k. By this time, I was aching to get rid of Fleet, so I sent all that money over to Citibank. This was an enormous feeling of relief: I was able to move about half my CC debt to a place where the rate wouldn't continue to kill me.

Actually, this is where I stood till the very end. I had my USAA card with its variable rate at around 7.5%, and my Citibank which had a rate of 3.9%. Incidentally, as soon as I got the Citibank offer, I set up an auto-pay on that account. This kept me from having to worry that I'd miss a payment and end up with higher rates. It also forced me to make sure that the money was in my bank account when withdrawal time rolled around.

Lately, I have been getting offers of 0% for a 12-14 months. This was too late to help my debt program, but I did take advantage of one (ATT Universal, which is the same as Citibank) to put some money into my account for a year, where it sits patiently earning interest and waiting to be sent back home to its rightful owner.

2) I stopped using credit cards. The rates only tell part of the story. It did help enormously to have lower rates; it made my work more efficient. But there was still lots of work to do.

When I first started to try to LBMM, I was still using my credit cards. I figured that, as long as I paid more than I spent, I was making progress, right? Well, it didn't really work that way. As I said earlier, this only helped me tread water. So, about 2 years ago, I made a scary decision... I went to using my debit card only. This was my real turning point. The money had to be there, in my bank account, before I would spend it. In effect, I could only spend last week's paycheck, not next week's. And, particularly, I couldn't spend next week's paycheck twice, b/c I forgot about some expense!.

This had another advantage: I could be confident in the fact that my debts were indeed going down when I made my payments. When I made the switch, my minimum CC payments and my car payment came out to roughly $750/month. Since I had managed to finagle low rates, most of that money (about $650) went towards paying principle! Knowing this, I felt as though all I had to do (at the time) was learn how best to live on what was left.

3) LBMM: When I had to make do with cash on hand, I got much better about doing this. I stopped buying silly things. I ate out much less. I was forced to really look at the money I was spending, as I spent it. This did wonders for me.

I did another thing: I went back through my old credit card statement, and looked at the things I spent money on. I thought about how important they were to me today, two or three years later. Often, not very important. I thought about how much money they actually cost me, after interest was worked in. Youch! I thought about how much money I had to earn before taxes to have that much money to spend after taxes, and how much of my given current work-day was devoted to paying off some pizza I ate because I couldn't be bothered to make a sandwich or run to a store.

Then I compared today's pizza, or CD, to the cost of $15 of my current debt. This curbed my spending in a hurry. "Do I really need this, or would I be happier with lower debt? Which will I appreciate more about in a year?" preceded every purchase. I also learned to never buy on impulse. If I want something, I wait to see if the appeal goes away (the more expensive, the greater the waiting time). I have learned that a very large number of items lose their luster after you walk out the store.

I also started cutting recurring expenses furiously. Don't watch HBO that often ($10/month)? Gone! I really only get to the gym 3 times a month ($35/month)? Gone! I can join the county-run facility for $60/year. Stuff like that. I also learned some other good habits, like cooking (courtesy of a patient DW).

With these habits, I really learned what mattered to me. Once I cut out things that didn't matter, I could deal with buying the things that did matter to me, even the slightly pricey ones ("I really want to go see that David Bowie show!"). Back when I was spending too much overall, I felt guilty about everything, whether I should or not. Once I figured out what things mattered to me, and I had my debt in decline, I didn't have nearly as much "spending guilt".

In retrospect, I wish I could have hit this point earlier. I would have avoided quite a bit of my debt. But what can you do? At this point, I just feel glad that the epiphone happened.

3a) What about that urge to splurge?
Hey, I'm not a monk. Even with my new focus, sometimes I just had the urge to go treat myself to something. The trick was to find something that I could feel completely and ridiculously decadent about, without paying an arm and a leg. For me, this turned out to be used cd's from a nearby record shop. Priced between $3-5, I could walk out with an armful of cd's for $40 (the price I might have paid for 2 or 3 new ones). One trip every couple months was plenty.

4) Side Work and windfalls: People here talk about getting a second job. For me, it was freelance web work. Once my budget was under control, all of the extra money I earned could go straight to the credit cards. This made an enormous difference. I also received a bit of a windfall when I finally shut down the record label, as I was able to fully realize all of my losses for tax purposes.

Other Important Things, and some Brutal Truths:
I could never, ever have done this w/o the support of DW. We both work, and I have kept my CC's separate from our financial life together (I never felt that she should have to pay for my debts). Not that she doesn't know about them, but I never wanted them to be a household bill. This would have taken far longer if we weren't one of those famed double-income/no-kids couples. More than that, though, she needed to be on my side. She needed to be understanding when I felt like I couldn't spend as much money on things. I imagine it is somewhat like being with someone who is on a strict diet... it affected her too. And she was on my side the whole way.

And I am not ashamed to say that she also made some significant monetary contributions towards the end. I made a ton of progress, but in the end, I didn't slay this demon alone (the estimate for my own full-payoff date was actually early next year).

Of course, now it is time to rebuild the e-fund (which got shallow with our final push), and start saving some money...


I know this was long, and I don't know if it helps. I appreciate the fact that my circumstances aren't the same as most folks, and that I am in a very fortunate position. But I also know that the basics are the same regardless of circumstance:
- reduce the rates,
- reduce the spending (cut those cards!),
- learn what things are important to you relative to their cost to your freedom or financial health. cut out whatever is unimportant. more of it is unimportant than you might think when you are starting.
- if you have a partner, their support cannot be underestimated. in fact, find support where you can. i didn't find this board until late in my personal process, but the people here have been great.

And hey, I'm sticking around...

-Brad

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