CUT UP YOUR CREDIT CARDS

Whoever called death and taxes life’s only certainties clearly never used a credit card or purchased a home or car. To finance our modern lives, debt is as inevitable as those other two verities. Yet uncontrolled debt is a homewrecker, the torpedo that can roil tranquil waters and sink your marriage. Let's you think that we’re getting carried away with the metaphor, consider these statistics.

According to the American Bankruptcy Institute, in the year 1980, there were 287,570 consumer bankruptcy filings in America; in that year, debt payment as a percentage of overall consumer spending was about 12 percent. Now, flash forward to the year 2000, which saw 1,217,972 consumer bankruptcy filings, an increase of more than 323 percent from the 1980 figure. In 2000, debt payment as a percentage of overall consumer spending was about 13.5 percent. It would take a more sophisticated study than this to determine the precise impact of consumer debt on personal bankruptcy, but it seems clear that the relationship is strong and frightening.

If those figures don’t scare you into fiscal responsibility, ponder this one as well. In 2003, 97.17 percent of all bankruptcy filings in America were for consumer bankruptcies. Part of the problem is that debt is a hydra-headed monster. It takes the form of mortgage payments, auto financing, credit-card interest, and interest on loans for home improvements and other activities. Very few of us ever take the time to add up our obligations in these various categories of debt; if we did, the total might shock us back to a cash-only approach.

Here comes the hard part: As soon as you've paid off the balance on a credit card, cut up the card, mail it back to the bank or other organization that issued it, and close the account. You may not be able to take the scissors to every credit card you have (because it's nearly impossible to transact business these days without at least one major credit card), but do so with the majority of your cards. Plan to keep one each of the major cards (be sure to pick the ones that have the lowest interest rates, or perhaps ones that require monthly repay
ment, such as American Express) and get rid of everything else.

In fact, you probably should cut up all but the chosen few cards as soon as you start working on eliminating your debt. (Cutting up a card doesn't mean that you erase the balance, of course, but it does prevent you from making additional purchases on the card.) Whatever you do, don't charge anything while you're still carrying a balance; doing so just makes the interest worse and the repayment time longer. And don't forget to mail it back to the issuer, along with instructions that they close your account - because the account can't be closed until they have the card in hand and know that you won't be using it anymore.

When we finally decide to rein in our debt, many of us get aggressive, determined to storm the debt beach in a D-Daytype offensive. We take every dime of our excess cash flow and apply it to our debt load. The problem with this “all or nothing” approach is that when an unexpected cost comes along, you’re left with no alternative but to increase your debt to pay for the surprise expense. The debt cycle can begin all over again.

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