In March 2008, Jeff Kosola, a 34-year-old an automotive engineer, came to terms with his debt. His wife had quit her job more than a year earlier when his company relocated him to China. Now back in Detroit, they decided she would stay home with their newborn. After daycare and work-related expenses, she would have taken home just a few hundred dollars a month. Meanwhile, Jeff's overtime income had evaporated in the recession.
Aside from their mortgage, they were $101,000 in debt.
"I thought, 'how are we ever going to get out of this?'" Kosola recalls. "I started thinking about extra jobs, and there was a pizzeria right down the street." Jeff began delivering pizzas Friday, Saturday and Sunday nights from 5pm to 1am, and the couple cut back on eating out and trips to Target and Best Buy. Between May 2008 and July 2010, they paid off $75,000 in debt.
In a positive sign for the U.S. economy, millions of American are taking control of their household balance sheets. On Tuesday, credit bureau Transunion reported that credit-card debt had fallen near 10-year lows to $4,699 per borrower -- a decline of 5%, year over year -- in the second quarter. Also, the number of people who were at least 90 days late with their credit-card payments fell 0.6%, by the end of the second quarter, to the lowest level in 17 years.
The Role of Consumers
Some analysts have suggested that lenders have primarily driven the decreasing debt numbers by writing off uncollectible debt, closing accounts and slashing the credit lines of the riskiest borrowers. But a separate TransUnion study released last month found that ordinary Americans like Kosola are equally responsible for the debt decline.
Between the first quarters of 2009 and 2010, consumers made $72 billion more in payments on their plastic than in purchases, the study found. That compares to $86.6 billion in charge-offs. "Charge-off is about half the picture -- the other half is really consumers trying to pay it down," says Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit.
While some consumers moonlight to get out of the red, others are taking advantage of 0% introductory offers. Gary B., a public relations executive in New York who asked to keep his last name anonymous, charged $7,000 to his credit card to send his twin 13-year-old boys to four weeks of sleep-away camp last summer. Six months later, he hadn't made a dent in the bill.
"I had to find a way to deal with it and eliminate the $100 or more of interest every month," he says. "Sleep-away camp is pretty common for us, but I didn't have the money, and if we just let them wander the city on their own it would lead to problems. I make a good living and my wife does too, but living in New York City is very expensive."
Gary transferred the balance to a card offering 0% interest for 18 months, then set up an automatic monthly payment from his checking account to pay it off in that time frame. Consumers who choose this approach have to watch out for balance-transfer fees: In this case, Gary paid 3% of his balance, or more than $200, for the transfer. But he will quickly make that in interest savings.
Tightening Your Belt
For others, the paydown strategy involves old-fashioned belt-tightening. Tracie Fobes, 39, a Missouri mom of three, began tackling her household's debt in November 2007. Between credit cards and auto loans, she and her spouse owed between $35,000 and $40,000. They had accumulated that debt steadily over the years, especially after she quit her job in 2004 to stay home with their first child.
"We had our second child and felt like we were living paycheck to paycheck," Fobes says. "We were doing okay, not struggling, but we felt the money was controlling us instead of us controlling the money."
Fobes held garage sales, sold household items on Craigslist and began aggressively seeking bargains, sharing her tips with friends. In January 2009 she started a blog, Penny Pinchin' Mom. By February 2010, the family was debt-free except for their mortgage. "It was liberating -- there's just nothing like it," she says. Meanwhile, Fobes issued her own debt paydown challenge on her web site. Visitors have reported shedding $118,000 in liabilities so far this year.
Meanwhile, Kosola hasn't charged anything to a credit card in three years. He pays his bills online and uses a debit card for day-to-day expenses. That's another burgeoning trend: Some 55% of consumers said they choose their debit cards over their credit cards more than half the time when making daily purchases, according to a June survey by IBOPE Zogby International, which was commissioned by TransUnion.
Although the hours were brutal, Kosola says he loved his delivery gig. "My real job is very high stress and I'm the boss with full responsibility for everything. When I went to pizza I didn't make a single decision. It was mindless and entertaining because there were a whole bunch of kids working there. I'd get to know the customers, and, once you develop a rapport with people, they always tip you."
Kosola's experience also demonstrates how reducing consumer credit-card debt can eventually stimulate the economy. He just bought a much larger home from a local builder. With a 30-year mortgage at 4.25%, his payment is just $12 more per month.
How to Get Back to the Black
Here are four tips to dig yourself out of the red:
1. Track your income and spending: To find cash to pay down your debt, you must know exactly what's coming in and what's going out. Write down everything you spend for 30 to 60 days with a pen and paper, an Excel spreadsheet or online software. Here's a list of free budgeting tools.
2. Get the details down: Use an online calculator, such as this one from CNNMoney, to figure out the difference that an extra $100 or $200 a month can make in your progress. Then focus on saving small amounts that day, week or month. Fobes said if she came in $150 under budget for groceries one week, she would immediately send that money to her creditors.
3. Call your lenders: List your cards in order of interest rate, from highest to lowest, along with the amount of the debt and phone number of the lender. Then call and ask if they would be willing to reduce your interest rate by 10 percentage points, indicating that you've received more competitive offers in the mail. (Make sure the representative who answers is authorized to reduce the rate. If not, ask speak to someone who is.)
4. Snowball it down: As soon as the card with the highest-interest rate is paid off, direct that payment to the next card until that one is paid off, and work your way down the line. Although some pundits suggest that paying off the smallest balance first will motivate you to keep paying your cards off, studies have shown that method isn't as effective as paying in order of interest rate. You'll get in the black faster by paying off the highest-interest-rate debts first.
5. Build a cushion: Once you've snowballed your way through the credit card debt, steer that monthly amount into a savings account until you have at least three months' of cash to cover living expenses. That will prevent emergencies from sending you back into the red.
Send me your debt paydown success stories, challenges or other financial questions at firstname.lastname@example.org.