Don't get eaten up by credit card debt!

By LISA CUNNINGHAM
The Associated Press

At age 23, Kimberly Griffiths was considering filing for bankruptcy. Her ex-husband, a gambling addict, had racked up $50,000 in cash advances on credit cards. Under Florida law, where she then resided, she would have to foot the bill.

To cope with the problem, "I had to consolidate the loans as best as I could," she said.

She found a job with a bank and eventually learned how to get out of debt. Now she operates a Web site, www.onepaycheckatatime.com, that teaches people how to budget when they get paid, not monthly.

Although Griffiths maintains that 70 percent of Americans live from paycheck to paycheck and spend $1.22 for every dollar they earn, she said people can learn how to budget more efficiently.

"In the U.S., we are so brainwashed to pay our creditors once a month, but we get paid once a week or every two weeks," Griffiths said. She recommends sending a creditor $25 a week and budgeting by the week.

"Living within your means sounds boring," Griffiths said. "Most of us have not been formally taught how to manage our money. People don't realize the consequences until they are completely overwhelmed."

The statistics on how credit card debt has increased in America are staggering. In 1970, an American's average credit card debt was just $24, according to Richard Bell of Calabasas, Calif., a Certified Financial Planner and immediate past president of the Society of Financial Service Professionals.

MasterCard was issued to the first customers in 1968. By 1980, average debt increased to $243 per person. A decade later, that amount soared to $962. But by 2000, the average American owed a whopping $3,470.

"People have no idea of the magnitude of the damage they're doing to themselves," Bell said. The appeal of instant money can be alluring. For instance, many credit card companies come to college campuses and entice students to sign up for their cards with free T-shirts, Bell said.

Mark Oleson, a professor at Iowa State University and director of the school's Financial Counseling Clinic, has seen the damage firsthand.

Often, the students he sees are paying off their credit card debt with student loan money. The amount of student debt he has seen can be astronomical.

One graduate student the professor worked with had borrowed $250,000 in student loans and hoped to be able to pay $300 per month from a $25,000 annual salary.

"Many individuals take an ostrich approach to finances, burying their heads in the sand and hoping things work out," Oleson said.

Since student loans must be paid back once the student leaves college, graduate school can be a tempting way out.

Oleson's clinic also sees people who aren't students. The clinic sees about 1,500 student clients in a typical year on an individual basis and another 4,000 in workshops.

Bell counsels people to first pay off their credit cards with the highest interest rate.

Although credit counseling agencies, which negotiate with creditors to make smaller payments, work for some consumers, Bell said that people can negotiate with creditors without a counseling agency.

What many people don't know is that some of those agencies, although many are nonprofit organizations, are actually owned by the credit card companies, said Howard Ehrenberg, a Los Angeles, Calif. attorney who sees as many as 2,000 debtors each year as a Chapter 7 bankruptcy trustee, appointed by the Office of the United States Trustees.

All credit card firms have departments to deal with people paying late or who need to set up smaller payments, Ehrenberg said.

Bell and Ehrenberg suggested that high school and college courses in finance would be very helpful, since most people receive no formal education in how to deal with their finances.

Even if a consumer can negotiate paying smaller amounts, it's a misconception that having large credit card bills won't impact their credit rating, Ehrenberg said. It's better than filing for bankruptcy, but their rating might still go down some if the amount owed doesn't drop noticeably, he said.

As for using credit cards, Ehrenberg advises people to search the Web and find a credit card with the lowest interest rate and do not default on payments. That way, the customer doesn't risk paying late fees and huge increases in interest rates that can increase from 10 percent up to 28 percent.

One alternative to an overwhelming amount of debt is filing for bankruptcy protection. But while bankruptcy filings hit record highs during the 1990s, Ehrenberg said most people do not want to file.

Griffiths said she was tempted to file for bankruptcy, especially after being in debt for five years and watching her friends buy expensive homes and cars while she ate rice and beans. But she realized that while bankruptcy could be seen as a quick fix, it has consequences: Someone who has filed for bankruptcy protection often can't get credit for a few years, she said.

Griffiths recommends that people call their creditors and ask them to bill them on the second week of the month or whenever the paycheck arrives.

"It's very much like going on a diet or quitting smoking; you have to say I'm not going to spend any more money on my credit cards," she added.

Now 38, Griffiths is proud that she's been out of debt for five years. Although she lives in one of the most expensive cities in the nation, she tries to practice what she preaches. "I don't pay retail. I don't go out (to eat) if I don't have a coupon, like buy one, get one free. In my experience, it's just one paycheck at a time."