How to get out of credit card debt

Many of us graduated college owing a bunch of money to someone. Or our first job didn’t pay us that much and we racked up some debt. Or we just didn’t pay attention to our finances because we didn’t think it would matter – and who expected to live past their mid twenties?!?

Whatever the reason, there is a way out. Actually there are many of them. I’m going to outline one today I have a lot of personal experience with. My family never understood student loans – we were a credit card family. And so through college, instead of doing the smart thing of accumulating a modest sum of student loans I could pay off over a decade or two I accumulated credit card debt. After I graduated, I didn’t really think about it much and, for the most part, the interest rates were low. Then I got hit with something called universal default. Chase changed the due date of one of my cards and I paid it late. This caused my interest rate on all of my Chase cards – where the vast majority of my debt was, to skyrocket for three or four percent to 29.99 percent (usary). That was rough.

In hindsight, the correct thing to do was to call Chase up and ask them to retain the original interest rate by closing the card for new purchases. Unfortunately, I didn’t even know that was an option. In fact, when you are in any situation where a credit card company changes the terms and conditions, you can reject these changes and the worst they can do is stop accepting new purchases from you.

So I discovered another way out through four steps:

1. Fix my credit. After Chase changed my interest rate, they cut my credit lines to just a few hundred over the current balances. This caused my utilization to skyrocket. There are two factors that appear to have great influence on your credit score (Your credit score is a grade given to you by credit agencies based on your credit history to determine how much of a credit risk you are--basically, what are your chances of paying back the money you are borrowing. The higher the credit score, the more money and at a lower interest rate will be offered to you). These are keeping your individual card utilization under 90% and keeping your overall utilization under 50%. Since my credit score was low, it was difficult for me to get a new major bank credit. Fortunately, the department stores, particularly furniture stores, don’t really care. So I applied for a few accounts at Home Depot and Thomasville furniture that reduced my overall utilization below 50%. At the same time, I paid down all of my cards with a high utilization down to below 90%.

a. Another way to go, that I did not take advantage of, was using authorized users. By having a trusted friend put you down as an authorized user on their credit card, their available credit shows up on your credit report (Note: if you miss payments, the authorized user's credit score will suffer as well). This is a quick way to increase your available credit, although the rumor is it will go away when the FICO model changes early next year.

b. If you have business income, you can also take advantage of the fact business credit cards do not report on personal credit reports. Therefore if you have a few good business lines of credit, you can use them to hide your personal debt and therefore make you more attractive for new credit.

c. One final thing you can do for a small boost is “bumpage.” The major credit bureaus only store a certain amount of information in your credit file. By repeatedly accessing your credit history daily, you can actually “bump” off old information, particularly old credit inquires. This does not result in a huge increase in your credit score – each inquiry only subtracts a few points – but nonetheless it may be useful in getting additional credit.

2. My credit score skyrocketed from the mid 600’s to the mid 700’s. The next step was to apply for new credit. I started getting a lot of pre-screened offers in the mail. These are usually the best to apply for because these offers only come because the companies involved have already looked at your credit. So I applied for and was granted several new cards, often with 0% interest rates for 12-18 months.

3. The next thing to do is to reallocate. It turns out if you have an old card from Bank of America with a $10,000 credit limit and a new card with a $1,000 credit limit, you can combine them and take advantage of the one with the better interest rate. So suddenly, you instead of a 0% credit card with a $1,000 limit, you have one with a $11,000 limit. Bank of America and Chase is an easy phone call to do this. American Express lets you do it online. Citibank apparently sometimes gives you some guff but usually if you call a couple times they will let you do this.

4. The next step requires really good credit – which you now have. Your credit ratios look good on paper if you maintained the 50/90 rule in step 1. So now, assume you have the discipline to do it, is to rinse and repeat steps 3 & 4. You will continue to get new offers if your credit is good and by applying for the preapproved offers and reallocating, you suddenly can get very large lines of credit. In addition, many credit cards will give you between $150 and $250 (sometimes even more) just for applying. By combining credit lines, you suddenly will have cards with lines of credit between $25,000-$50,000. If you do a 0%/18 month offer one one or more of these cards you can earn thousands of dollars in interest income by just putting the money in a high yield savings account. (Although in other articles we will discuss better ways to do this without having to pay the taxes associated with interest income.)

So in the end, by following the steps above, you not only repair your damaged credit from high debt levels, but you actually pay off your debt with introductory “promotional” offers from the credit card companies – the same companies that raised your interest rates are paying off your debt! Remember, the above approach takes patience and discipline. You can’t go party once you have your first $50,000 0% credit card!

-Wageslave