Eliminate unsecured credit card debt

Your prelude to financial freedom

WHEN SUZETTE SCARBOROUGH GRADUATED FROM Cornell University in 1989, she had 19 different credit cards but was only $5,000 in debt. Immediately upon graduation, she landed a great job with Coopers & Lybrand, in New York, as a human resources professional and was living the life, or so she thought. She would frequently jet across the country with her sorority sisters to various conventions. Developing a taste for the finer things in life, she began to purchase Liz Claiborne suits and Coach bags from Lord & Taylor. She caught all of the Broadway shows, and would travel to different cities just to see Phyllis Hyman sing. Her credit card debt was rising steadily.

"I had the mind-set that I didn't have to wait for what I wanted. I could have it now," recalls Scarborough, 33, who resides in Brooklyn, New York. "By 1997, I was $32,000 in debt, including the $10,000 balance on my GEO Prism. I was making all of this money, but it was going to all of these banks."

Scarborough is not alone. According to a Federal Reserve report for May 2000, total consumer debt--mortgages were not factored in--hit $1.45 trillion, up almost 10% from a year ago. The same source reports that credit card debt was $626 million in May 2000, up 8.9% over the previous month. According to Myvesta.org (formerly Debt Counselors of America), an online credit-counseling service (www .myvesta.org), for every dollar the American family earns, it spends $1.22. Family debt was $33,300 in 1998, up 42% from 1995. However, the average net income per family was only $27,219.

Determined not to remain a part of these statistics, Scarborough cut up her charge cards and began to track her balances, including how much she was paying off and how much she was accumulating. She read all of the finance articles she could get her hands on, started attending seminars, and began paying down her debt.

By 1999, she owed $25,000. Later that year, she received a $26,500 severance package from her employer. This allowed her to pay off the remaining $22,000.

For many Americans, being debt free may seem like a pipe dream. But it is possible to live a debt-free life. Just know how to recognize the types of debt. In her book Debt-Proof Living: The Complete Guide to Living Financially Free (Broadman & Holman Publishers, $14.99), Mary Hunt cites the following "debt traps": credit card accounts, monthly installment plans, overdraft protection plans, past taxes, student loans, medical and dental bills, and personal loans.

"People often find themselves getting into secured debt, such as mortgage and car loans, which they can sell to get out of debt," says Hunt. "But the dangerous types are unsecured debts such as credit cards and signature loans."

According to Michael Kidwell, co-founder of Myvesta.org, consumers have to recognize the warning signs of debt. Those clues may include always having to use credit cards when you make a purchase; only being able to make the minimum payment on cards; and going from using one credit card to using two, three, four, and then five, and never paying off the balances.

In this article we will focus on the elementary methods you can use to get out of debt. In their book Get Out of Debt: Smart Solutions to Your Money Problems (Myvesta.org, $19.95), authors Kidwell and Steve Rhode, who co-founded Myvesta.org with Kidwell, offer consumers five simple ways to get out of debt: (1) stop incurring debt; (2) track your cash; (3) plan for the future; (4) don't expect instant miracles; and (5) seek professional help. We look at each of these and show you how you can apply them to your financial plan.

* Stop incurring debt. This keeps you from going further into debt. "Going into debt rarely happens overnight. It usually creeps up over a period of time," says Kidwell. "It starts out innocently with one credit card. Then a large home mortgage, vacations, and student loans. Before we know it, we are living from month-to-month and paycheck-to-paycheck"

Tony and Triscilla Weaver of Stone Mountain, Georgia, know the feeling of living from paycheck to paycheck. Both were raised in single-parent, female-led households where money was always an issue and being debt free was a fantasy. "It showed us both things that we knew we would not want to go through," says Triscilla, 33. "We decided, early on in planning our future together, that we would be debt free."

When the couple married in 1986, their debt consisted of a new $60,000 home, two car loans (Triscilla's monthly payment was $300 and Tony's, $350), and six credit cards between them that included Zales Jewelers, Kay's Jewelers, Goodyear, J.C. Penney, and two separate Rich's Department Store cards. Although Triscilla's charge cards did not carry any balances, Tony's cards, combined, carried a balance of several hundred dollars.

"We sat down with our bills and made a budget. At that time, Tony was making nearly $30,000 per year and I was making less than $15,000," recalls Triscilla. "We decided to pay off all of his credit cards first, and that left us with the two car notes and our house note. It was an uncomfortable feeling having to pay two car notes at the same time, and we said that after that, we would never do it again."

Over the past 14 years, Tony, 37, and Triscilla have alternated getting new cars. She now drives a 1992 Toyota Camry that was paid off in 1995. Tony's 1996 Ford Explorer was paid off this September. During their marriage, they have remained virtually debt free. Their yearly income has more than doubled. As a route manager for the Atlanta Journal and Constitution, where he has been employed for 18 years, his salary is $55,000. Triscilla makes $55,000 as the assistant principal of Stephenson Middle School in Stone Mountain.

* Track your cash. You should be able to identify your spending pattern in order to achieve financial success. Budgeting monthly and tracking your debts are ways to track your cash and expenses. This step is key to becoming debt free. Just ask the Weavers. They make note of what they spend and find ways of cutting costs wherever possible. Although they now live in a $275,000 home in the exclusive Southland subdivision and their neighbors are doctors, lawyers, and executives who drive shiny Mercedeses, Lexuses, and Jaguars, the Weavers live on a strict budget. Because they do, they can put all of their extra money into savings and investments. "We have always lived below our means and do not try to compete with others," states Triscilla. "We don't have the nicest car or biggest house because we focus on what is comfortable and meets the needs of our family."

Amazingly, the Weavers have been able to remain practically debt free even though Triscilla has been attending school over the past 13 years. Most people use student loans as an excuse for being in debt. But the Weavers consider the investment as another bill that requires planning. Since their marriage, Triscilla has worked full-time while pursuing her bachelor of science and master's degrees in middle-childhood education. She is now working on her doctorate, which she will complete in 2001.

"We've spent $45,000 of our own money already. I have never gotten a student loan. We set the criteria that I would only take classes that we would be able to pay for," says Triscilla. "We would save the money for three months prior to the semester. My education has been a part of our monthly budget for the past 13 years."

* Plan for the future. Before you can achieve financial success, you must have clearly defined goals. When individuals are in debt, they have no financial security, no savings, and usually do not invest in 401(k) plans. "Being in debt prevents a [financially secure] future. You are transferring your wealth to the creditor," says Hunt.

"Being debt free relieves stress, and that plays a major role in your lifestyle," says Tony. "Since we are debt free, it allows us to save a great deal and to invest in our 6-year-old son T.J.'s future and our retirement."

To show individuals how to stay out of debt, Ric Edelman, a financial planner and the chairman of Edelman Financial Services, teaches a seminar called "Square One" that shows consumers how to get out of debt. "The first thing we do is teach consumers to examine their spending habits. Too often people have no idea where their money goes," says Edelman, who is the author of The Truth About Money (Harper Resources, $19.95). "We then show them how to reduce unnecessary spending and how to anticipate future spending. This allows us to focus on income and existing savings, and allows us to set up a plan to eliminate the existing debt."