Laura writes in with the following plea for help with getting out of credit card debt:

I came across your web site today and I love it!  My husband was out of work for nearly 2 years.  We always had enough money to pay our bills so our credit line was very high.  Well, I used it, all of it.  I paid the phone, the car, taxes, one credit card paid another and so on.  I know I broke every cardinal rule but I did what I had to survive.

My husband is now working.  We are paying the mortgage company every week $500.00 to catch up.  My credit cards are over $80,000.00.

Here is my question…Now that we are getting back on our feet, how do we square up with the credit cards with out ending up in the same position?  I can give them each (all ten of them) 40.00 a month, but that won’t make a dent and I don’t even think they will take that low of an amount.

Laura, thank you for taking the time to share your story. It sounds like you and your husband have had a rough couple years, financially, but there will be brighter days ahead. My first piece of advice has little to do with finances, and more with your relationship with your husband.

I want to encourage you to fully disclose your financial situation to your husband. Perhaps you have already done so, but in your email you indicated “I used it, all of it. I paid the phone, the car, taxes…” I just want to make sure you and your husband understand the situation fully, and understand that while you did what you had to survive, we must now work together to clean it up.

Kudos to you for working to get the mortgage caught up, and for making that a top priority. So many times people in your situation make payments to credit cards before the mortgage payment because some obnoxious credit card collector is breathing down their neck. Prioritize the income you now have coming in putting things like food, shelter, lights, and transportation at the top. You’ll work around to the credit cards when you can, but those things must be paid first.

Consolidate Your Accounts

With ten credit cards you do have an uphill battle, but paying them off is not impossible. You didn’t share exact numbers/balances with me, but I understand your current budget only allows for $400 to go towards repaying the credit cards (hopefully you’ll have even more once the mortgage is caught up).

Spread across 10 cards, that $400 budget only leaves $40 per card. You might consider a consolidation loan with Lending Club to reduce the number of accounts (and minimum payments) you are required to pay each month. If you can successfully consolidate your accounts, but sure to close or tear up the cards of those that are paid off. Else you may revert back to old habits and begin using them again.

Sell Stuff to Raise Cash for an Emergency Fund

It would be great if you could build up a small emergency fund of a couple thousand dollars before starting your debt repayment plan. I worry the next emergency will lead you back to credit cards, and zap any progress you’ve made towards paying them off.

Do you have anything you could sell to fund this emergency fund? An extra vehicle? Old jewelry you no longer wear, but may have cash value? Appliances? Electronics? Consider hosting a yard sale or two. I’m not advocating you sell all the contents of your home, but this step will require an extreme measure or two to get an emergency fund in place.

The Debt Snowball

Here’s my advice for handling the remaining credit cards. Start with the traditional debt snowball. List your cards smallest to largest according to their current balance. The standard advice here is to pay the minimums on all accounts to keep them current, and pay anything extra on the smallest debt. In your situation, I’m not sure that’s possible, considering the sum of all minimum payments is likely much higher than $400.

I’d advise you to consider making a substantial payment – at least a couple hundred dollars – on the account with the lowest balance. Use any remaining funds to pay minimums on the next card or two. Hopefully, that card with the lowest balance can be paid off within a couple months, and when it is, walk that money right up the debt snowball to the account with the next lowest debt, and so on. The guys at the end of the list will probably be kicking and screaming for payments, but if you can’t get to them, you just can’t get to them.

Increase Your Income

While working this debt snowball, it would be great if you could find creative ways to increase your income. Perhaps you or your husband could work some overtime or a part-time job, or work from home in off hours. As you acknowledged, you are in a pretty big hole, so increasing the size of your shovel would certainly help get out of credit card debt that much faster!

I wish you and your husband the best on your journey to debt freedom. It will be a long road, but as someone who has just recently experienced debt freedom, I can tell you that every sacrifice is completely worth it!

Ask the Readers: Do you have any additional advice for Laura? Words of encouragement?

Since becoming debt free my wife and I have started using a credit card to consolidate our monthly bills. I’ve shared a bit about this stragegy in the past, and several of you have asked me to share which card we decided to use. Out of the small stack of cards we had accumulated over the years, only our American Express Blue Card and a Visa card from our credit union survived our sharpest pair of scissors.

To simplify things, we decided to use our Amex Blue card to hold all recurring, monthly charges, such as utility payments, subscriptions, etc. The benefit of this plan is two-fold.

First, it makes managing our primary checking account much easier. No longer do we have to reconcile five or six utility payments plus a number of subscriptions (Netflix, Onstar, etc.) to our checking account ledger. We simply write one payment to pay off the American Express Blue card and record it in our checking account.

Another benefit of charging all of our recurring expenses onto a single credit card is that I am able to get a consolidated view of our monthly outgo, grouped by category (more on that in a moment). I can even analyze total expenditures in each category over time online.

Sure, I could do the same thing using personal finance software, but this way I don’t have to download any transactions from multiple sources, or share any login information, making this a one-stop, secure shop to viewing our expenses.

American Express Blue Card Review

Customer Service/Website Interface I’ve never had a problem with Amex customer service, and their interface recently added some features that I’ve come to enjoy. Members may “tag” transactions using user-defined categories and view a number of reports/views based on those groupings. So far, I’ve grouped transactions by Monthly Bills and Vacation (we use this card for reservations and travel expenses). I can graph those categories over a specified time to track spending, and even pay a particularl “bucket” of my balance from a separate account (paying for vacation out of our vacation fund, for instance).

An example of the “transaction tag” I referred to above attached to my Netflix subscription fee. Notice the “Monthly Bills” designation under my Netflix charge. At the end of the month, I sum up this category to determine my monthly, recurring charges.

Competitive Rate While I plan to pay off our American Express Blue card every month, it’s nice to have a competitve interest rate on your card just in case you need to stretch your payments across a couple billing cycles. Blue comes with that flexibility to pay over time, and a 0% introductory APR for 6 months.

Rewards Program A rewards program is not what really sells me on a credit card product. After all, most programs would require thousands of dollars in spending to earn a modest reward. However, if a credit card issuer is offering to give me points just for using their product, I’ll take them!

With the Amex Blue card you earn 1 point for every eligible dollar, 2X points at the American Express Travel website, and 2X – 10X when you make purchases with select partners. Rewards are available in a variety of categories such as travel, gift cards, cash, merchandise and entertainment.

No Annual Fee – A number of Amex products (and others) have outrageous annual fees. I simply refuse to pay a fee for the privilege of charging items to the card. My Amex Blue card has a $0 annual fee.

Additional Benefits I’m Not Likely to Use, but are Nice to Have

Extended Warranty American Express extends the manufacturer warranty for purchases made using your Amex Blue Card.

Purchase Protection Eligible purchases made with the Amex card are protected against accidental damage and theft for up to 90 days from the date of purchase.

One of the most difficult parts of getting out of debt is transitioning from a spender to a saver. I’ll be honest with you. My wife and I loved to spend money. I loved it so much that I racked up over $16,000 in credit card debt over a period of a few years. That $16,000 doesn’t even include all of the other things that I bought on my credit card that I paid off at some point. For my wife and me, going from spenders to savers has been a little more difficult than you would think.

Our Spending Years

My wife and I have been working since an early age. I started working odd jobs in the neighborhood when I was about 12. I would mow peoples lawns, clean out their garages, etc. It earned me a few bucks to play around with. Sure, I saved some money here and there, but as soon as those savings hit a threshold, I spent it. Due to my spending, things began to pile up in my room. I had new video games, a cell phone, CDs, and all the new electronics. Life was good and I had plenty of things to show for it.

As the years went on, I got real jobs that paid me a little more than the neighbor down the street. That money helped me get a car, pay for gas, and take my future wife out on dates. Then came college and the dreaded first credit card. Man did I love that piece of plastic. I mean, they only gave me a $500 credit limit. What could go wrong? Well, as you can guess, I got more cards and higher credit limits. I was buying new computers, clothes and every new cell phone that came out (can you tell I like electronics?). Oh the days of spending…..

My wife started working at 15. I can still remember picking her up at the local fast food joint smelling like deep fried goodness. She spent her money on clothes and loved doing it in the process. It was her weakness and she knew it. Being the first born child, she didn’t get the hand-me-down clothes like her sister (who made out like a bandit if you ask me). My wife wanted to look good and she spent her money on clothes to do it. She never really racked up any major credit card debt (she mostly used cash). The most credit card debt she had was a few thousand dollars worth and it was all school supplies (she was in a major that required additional things). She loved knowing that her money was hers and she could do what she wanted with it. Oh the days of spending…..

Time to Shred the Cards

Even before we said “I do”, we knew financial trouble was on the horizon if we didn’t do something. We sat down, came up with a game plan, and wrote down our goals. The first thing to go was our credit cards. Let me tell you something, shredding something that has been in your life for almost 7 years is tough. Knowing that we couldn’t buy anything on a whim was even tougher. Here are a few things that we did to help ease the pain:

1. We Wrote Down Our Goals and Came Up With a Game Plan

Like I mentioned above, we sat down and had a deep discussion about our financial future. We talked about what we wanted out of life and how we were going to achieve that while not adding to our debt. It was a difficult night, but we came out of it stronger financially and as a couple.

2. We Set Up a Budget

This was one of the harder things in the process. Before we got married we were free spenders. Sure we made sure we didn’t overdraft our accounts, but we spent our money on what we wanted. In the budget, we spent every dollar on paper and stuck to it. Sure there are times when we veer of the path somewhat, but we correct it and move on.

3. We Didn’t Cut Out Everything

When most people think about budgeting, they think about cutting everything down to the bare minimum. Well, we just couldn’t do that. We would go crazy and knew it would end up hurting us in the long run (by causing us to revert back to our old ways). So in our written plan, we budget for things such as eating out once or twice a month. I mean, sometimes you just need to get out of the house and interact with people or spend some romantic time with your spouse. We also budget about $50 a month to spend on clothes. The budget actually helps my wife think long and hard about what she is buying. Before, she just bought what she wanted when she wanted it. Having the budget changes that.

Well, there you have it. That’s how we transitioned from spenders to savers. Let me just say that it was hard and still continues to be today.

How did you handle your transition? Was it easy, hard?

There have been few more controversial credit card practices than the one known as Universal Default. With the arrival of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, it is soon expected to be a thing of the past.

The elimination of universal default is one of the most important provisions of the sweeping federal legislation, signed in May and going into effect in stages through next August, that is expected to change the face of the credit industry, probably including ways that we do not yet expect.

What Is Universal Default?

Universal default provisions, often buried in credit card contract gobbledygook, have allowed the credit card companies to charge cardholders more interest for late payments that had nothing to do with that specific account. Simply put, this common provision has allowed the credit card companies to increase the interest rate when a consumer fails to make a payment on another unrelated account, be it another credit card account or some other type of credit account. Like a phone bill. Or a water bill.

The CARD Act would limit increases in interest rates to “a specific, material violation of the card agreement by the issuer,” according to a Senate Committee report on the bill. It also requires credit issuers to lower penalty rates after six months if the cardholder meets his obligations.

The dollar amounts involved in Universal Default can be significant. The finance website The Motley Fool calculated that an $8,000 balance could see an increase of $1,200 per year with an interest rate rise of 15 to 30 percent. If you are on the border of being able or not being able to pay your credit card bills, the default provision can make the difference, particularly when compounded over several cards.

Advocates of the universal default provisions would say that they are accepting the reality of a consumer’s overall credit profile. If a person fails to make a payment on another account, it could indicate that they will have a more difficult time making a payment on the subject credit card account when the time comes. Therefore the increase in interest rates can discourage further borrowing that cannot be met with payment. In addition, it keeps more reliable cardholders from having to pick up as much of the tab if in fact that person eventually defaults on the balance.

Critics of Universal Default, however, point out that having multiple creditors simultaneously raising the interest rates and charging the consumer more can create a credit card death spiral that would not have existed without the universal default provisions. In addition, they have questioned the fairness of altering a contract when the contract has not been violated. It is perfectly reasonable to think that a person can miss a payment on one card for a variety of reasons and still make the regular payments on another.

Is Universal Default really dead, or will credit card companies figure out other ways to accomplish the same goals? Only time will tell.

In what could ultimately be a game-changer in the credit card industry, it appears credit card companies are considering charging customers a new sort of annual fee – for paying off your balance each month. The information is coming slow, but I did find a good article by USA Today, Latest Bank Fee is for Paying Off Credit Card On Time Every Month, that runs down a few of the cards and their new tactics.

Credit card companies, and their defenders, will of course point to the new Credit CARD Act, which will limit revenue opportunities for credit card companies. However, in my mind, this is yet another customer-losing reaction to the impending legislation. You can blame the law of unintended consequences and thank the government, or you can blame the credit card issuers and close your accounts.

In the past, any time I’ve mentioned closing all my credit cards and living on cash, I get dozens of comments extolling the benefits of using a credit card. There are reward programs, and added consumer protection policies, and of course the convenience factor. To sell their position, fans of credit cards always pointed out that you could simply pay off the balance every month to avoid interest and fees. What if that isn’t true in the very near future? Does that change their opinion? Does it change yours?

Just when I start to get comfortable using my one remaining credit card (I use it to run through gas and utility payments and pay it off at the end of the month), news like this comes out and makes me skeptical of credit card companies all over again.

At what point do we just make ourselves immune to the whims of bank CEOs and government officials and say to heck with credit cards? Just shred ‘em! Well, I am getting pretty close to that point. If the issuer of my last card decides to play these fee games I’ll take a pair of sharp shears to it and live on cash. Come to think of it, I doubt I’d miss them.

Melissa writes in with the following question about closing credit cards:

I have an old credit card account where my charging privileges were revoked because I was having trouble making my payments.  I have since then paid off the card and it is at a zero balance.  Do I now close the account?  Would it help my credit more if I left it open?  I am trying to rebuild after years of bad credit decisions.

Deciding to close a credit card or leave it open is a tough decision. Unfortunately, it sounds like the credit card issuer beat you to the punch. Chances are they closed your account due to past due activity, which is a major blow to your credit score because it reflects that the account was closed by the issuer, rather than by you, voluntarily.

Now that the card is paid off, you might try contacting the issuer to ask if they can update the account to reflect it was closed voluntarily. They probably won’t change the account’s status, but it’s worth asking. The very fact you paid it off will help heal your credit score, as will time since the last activity (negative information should drop off your report in seven years after the last activity).

If in fact your account still reflects “Open” on your credit card, you may want to consider leaving it open to help rebuild your credit. To do so, charge something you buy every single month, and don’t have a lot of discretion in the amount spent (gasoline, or a utility bill, comes to mind). When your credit card bill arrives, pay it off promptly. This continued, responsible use of credit will help boost your credit score over time.

There is, of course, another side to this argument. Some would argue to close it and leave it closed. Don’t play with snakes. I used to feel this way myself, but since turning around my own finances over the course of a couple years, I’m now empowered by the fact that I can buy something on my credit card for purchase protections (particularly when shopping online), and simply pay it off in full later in the month. I’m in control now; not the credit card.

It sounds like you’ve made a lot of progress in your own financial turnaround, and I applaud you. Whatever you decide to do, don’t repeat those same mistakes from the past that led to problems paying your bill. The road back to responsible credit use can be a slippery slope, so if you feel yourself start to slip, put that credit card away and go back to spending cash.

When I worked in a credit card customer service call center a decade ago I bet I took a dozen calls a day related to overlimit fees being charged to cardholders’ accounts. I was of course trained to toe the company line, explaining that fees were well documented in our terms and disclosures, and by using the card customers agreed to those terms. Inside I always felt a little dirty.

Ultimately, I decided to leave the industry altogether for a variety of reasons, not just because the companies I represented charged fees. But one that always got me was the overlimit fee. To me, overlimit fees were an interesting example of human behavior mixed with strange business practices.

On the surface, you would think a $39 fee would be enough of a deterrent to keep people from charging above their credit line. Unfortunately, that is not the case, but it is not the whole story either. Credit card companies are nice enough to include an “authorization pad” (usually a few hundred dollars) so charges in excess of your available credit may be approved by merchants. Nice service, huh?

It would be a nice service if they didn’t follow up their generosity with an overlimit fee. Theoretically, a $10 purchase that barely puts you over the credit limit could cost you $49 thanks to the additional fee.

Why don’t credit cards decline transactions in excess of the available credit? Their answer (spin) is usually something like, “We are saving customers the embarrassment of being declined.” Gee thanks. And what a bargain! The real truth is they allow the charge to go through so they can charge overlimit fees.

That practice may not be happening for long though. As this Consumerist post points out, Amex and Discover have already ditched overlimit fees. Before you feel too sorry for Amex or Discover (yeah right), realize that this loss of income will be made up elsewhere – probably by reducing reward program benefits, and increasing rates.

This move to get rid of overlimit fees can be credited mostly to the CARD Act passed in the spring. When enacted, the CARD Act will require issuers to “opt in” to the feature of being able to exceed their credit limit, and be subject to a fee. That involves a lot of maintenance to cardholders’ accounts, so Amex and Discover decided it wasn’t worth the hassle. I’d expect other issuers to follow suit, except the subprime credit card issuers who would tack on a fee for being charged a fee if they could.

Any worries over credit card overlimit fees can be ignored if you simply decide not to spend on a credit card, particularly one that is nearing its credit limit. Charging in excess of your credit limit is the financial equivalent of spending more than is available in your checking account, and both actions may result in nasty fees.