Suze Orman Money Matters

If credit cards were alive, most of them would keel over with exhaustion in December. To pay for our splurged-out sleighload of pricey gifts and holiday extravagance, a lot of us drive ours harder than the Grinch did poor Max.

But then it's January and suddenly your festive little joyride ends with a big financial crash. All the crazy spending you did in December hits home when the credit card statements start showing up, and you find yourself sweating bullets in the dead of winter over the size of your balance. Talk about a painful hangover.

But listen now, I do not want you going into denial or depression over all the money you owe. Un-uh. We've got a new year here, folks. That means you have the opportunity to make this year different from every other year. This year you will control your card situation. For many of you shopaholics, this has simply got to be Resolution Number One. Do you hear me?

Besides, it doesn't have to be as difficult or unpleasant as you think. Having a plan is half the battle, and I've got just the remedy for your current card hurt right here.

Six Steps to Holiday-Debt Freedom

Follow these six steps to recover from your holiday excesses:

1. Stop Avoiding the Problem - Avoidance is Not a Debt Management Strategy
I am constantly amazed how many people "deal" with their credit card debt by simply refusing to open the billing statement envelope or email when it arrives. Hello, when has denial ever fixed anything in life? Be honest. Never, right? And if you try this with your finances you are going to end up literally paying double for it: every bill you don't pay on time comes back to hurt you twice. First, you are going to be hit with late fees and interest charges. As if that's not bad enough, you are also totally screwing up your FICO score. When you fail to make a payment on time, your score gets a serious ding. So by not paying today's credit card bill you are going to increase the cost of every loan -- or new credit card -- you take out down the line. Denial is just plain dumb. Open the statements the minute they arrive.

2. Make Like a Swiss Watch
Okay, once the statement is open, don't panic. I want you to concentrate on the line item where it tells you your Minimum Amount Due for the month. You are to make that payment right now. I don't care if the payment isn't due for two weeks. I want you to pay it right now, while you are thinking about it, so there will be no chance that you simply "forget" about it, or the dog eats it, or whatever.

While it is my fervent wish that everyone would be able to pay off their bills each month, I know that's about as realistic as Donald Trump being modest. So the next best thing to do is to pay at least the minimum amount due on time, every time. That small feat is going to make the FICO pooh-bahs pretty happy; your ability to pay on time accounts for 35 percent of your FICO score. Let me say that again: the FICO folks don't insist that you pay off the whole enchilada on time, just that you make the minimum payment on time. Come on, that's not asking much.

Now of course the smartest move is to pay more than the minimum amount due. Don't psych yourself out by staring at the big balance; just make a deal with yourself. You will pay the minimum amount each month, plus a reasonable additional amount. It's up to you what that extra amount is, but if you can make it, say, $50 or more, you will be amazed what a huge impact it is going to have on your finances.

For example, let's say you have a $5,000 balance where you pay 15 percent interest. Your monthly minimum amount due is $125. If you just stick with making the minimum each month, it will take you more than 21 years to pay off the balance and you will pay about $4,800 in interest charges. But if you merely keep up that $125 payment as your credit card company lowers your minimum monthly payment to match your shrinking balance, you will be out of card debt in less than 5 years and pay just $1,975 in interest rate charges. Now just imagine what would happen if you started out paying $150 or $175 a month. The lesson here is that constancy and very small sacrifices dissolve debt much faster than we expect.

3. Show No Favoritism
If you have multiple credit cards, be sure you make those timely payments on each one. Don't try and get cute by being super-responsible only on your one card with the great interest rate, while making late payments on other cards. Why? Because the credit card companies happen to be watching you like Big Brother. Every card keeps tabs on how you handle every other card. Their prime objective, remember, is to jack your interest rate as high as possible, because that's how they make money. So if you have a low-rate card at, say, 6 percent, you'd better believe that the card company is working overtime looking for excuses to raise it to 15 percent or 20 percent. One of the ways they accomplish this is by having a clause in your contract allowing them to raise your rate if you are late on any credit card payment, not just theirs. Even if you have a perfect track record with them, they'll snoop around your credit reports to see if you've been naughty or nice with your other payments. If you were late on one of your other cards, you've broken one of their "rules" and can kiss your great rate goodbye.

4. Consider a Balance Transfer
If you absolutely can't get your holiday spending paid off in one month, and you currently pay more than 10 percent interest on your credit card, I want you to look into doing a balance transfer. This is when you move your existing credit card balance to a new card that offers you a better deal. Often, balance transfer offers come with an impressively low interest rate for an introductory period. In those cases, just be careful to make sure the new card is really better for your situation before you jump at that tempting introductory rate. If you think you can get the balance paid off in the time allotted for the intro period, then offers where your interest rate is something like zero to five percent for the first six months can be a great deal. But you always need to make sure you understand what the rate will be after the intro period is over, along with calculating the odds that you could still be making payments then. If you come out of the period still carrying a balance and the rate skyrockets to 20 percent, that's probably not going to help you in the long run.

You also need to realize that on a balance transfer the intro rate does not apply to any new charges you make on that card. So again, it's all about digging into the fine print or calling customer service to find out what the rate on new charges will be. If it's a super-high rate you've got two choices. Shop around for a better deal, or simply vow to only use that card for the balance transfer, and use another card for new purchases.

If you apply for a balance transfer and your application is accepted, I want you to stop for a sec and give your "old" card one final chance to help you. Call up their customer service and tell them you are going to move all your money if they don't match the offer from the new card. If you have a good FICO score, they should want to keep your business. And it's always preferable to keep an old account rather than opening a new one because you're building credit history.

Speaking of which, if you do go ahead with the transfer, don't cancel the old card, especially if you have had it for years. Your credit history -- meaning your charging and bill-paying habits on your old cards -- plays a significant role in your FICO score. When you cancel a card you have had for years, you are wiping out that history. Instead, just keep the card (as long as it doesn't have an annual fee!) and don't use it; if need be, cut it up with a pair of scissors. That will take care of any temptation, while also keeping your account history intact.

5. Free Up Cash to Pay Off High-Rate Card Debt
If you don't qualify for a low balance transfer rate, your goal has to be to get the entire balance paid off ASAP. First, if you have money in a savings account earning 2 percent, and you are paying 18 percent interest on your credit card balance, you need to cash out the savings to pay off the debt. Yes, yes, I know your savings are your safety blanket -- hey, I am the biggest proponent of having an emergency cash stash -- but when you are sitting on a $5,000 credit card balance at 18 percent you aren't safe, no matter how much you have socked away in your savings account. So use the money to pay off the credit card balance. And don't worry too much: if a true emergency arises, you can use your credit card to cover any absolutely necessary costs.

If you don't have any savings, then it's time to look at your 401(k). If you contribute to your company plan and your boss kicks in a free matching contribution, I want you to make sure you contribute enough to get the maximum company match. But once you've hit that limit, ask to suspend your contributions. That will increase your paycheck, and every bit of that extra income ought to go toward paying off your credit card bill. Hopefully you can polish off the balance in a few months. But if it's going to take longer, you must make sure to shift again at the end of 2005 and un-suspend your contributions so you will be eligible for next year's company matching contribution. Those payments into your retirement fund from your boss are free money you should never turn down. Resume your contributions in 2006 and then once you've hit the max, it's time for an instant replay: suspend your contributions again and use your bigger paycheck to keep whittling away at the credit card balance.

One quick DO NOT: Do not take out a Home Equity Loan or Home Equity Line of Credit to pay off your credit card debt! Any loan on your home means the lender can ultimately force you to sell it if you ever fall behind on your payments. That's because these types of loans are what is known as secured debt, i.e. a loan with collateral to secure the lender against loss. Your home is your collateral; if you screw up and don't make the payments, the lender has the right to make you sell that collateral to get its money back.

Your credit card, on the other hand, is unsecured debt. That means that even if you punk out on your credit card payments (and I am in no way advocating you ever do that) the credit card company can't force you to sell anything -- your home, your car, your prized Pez dispenser collection -- to get its money. So you never want to use a secured asset (your home) to pay off an unsecured debt (your credit card).

6. Deal Yourself a Better Card Hand
I wish there were rehab clinics to help heavy card users truly kick their debilitating spending habits. Instead, what I see way too often is people expending so much time and effort to get their card balances paid off, then turning around and running up new balances all over again. Total relapse.

Ultimately, the only thing that will keep you out of trouble again next December is to find the resolve not to dig yourself another deep hole.

I know that's easy to say, and excruciatingly tough to pull off. But why don't you see what you can do during the year to make holiday season 2005 less financially stressful? How about opening a holiday savings account right now, in January? Have $50 or $100 automatically transferred each month from your checking account into this savings account. Then, when December rolls around, that account -- and only that account -- constitutes your holiday spending budget. Not a penny more! Make yourself that promise today, and spend the rest of the year building up the strength and confidence to stick to it when those enticing wreaths begin appearing in the store windows ten and a half months from now. Shopping temperance is a challenge, no doubt, but follow my plan and you won't have to face another new year with that same old painful hangover.