August 2001

• Editor's Notes
• Coming Together Through Family Historyby Lisa B. Hawkins and Cynthia Doxey
• Do You Need to Clear the Air?by Maribeth Clarke and Carolyn Garrison
• Beloved Children, Faithful FathersCaring for Children with Special Needsby Thomas B. Holman
• The Credit Trapby Bernard Poduska
• Mothers Adopt Advertising Code

    DURING THE WEEK before her eighteenth birthday, Alice received three credit card offers in the mail. One of them stated that Alice needed to establish a good credit rating in anticipation of future debts for education, a home, a car, etc. Although Alice had no job-her only income was her allowance-she applied anyway and was delighted when the credit card, with a $500 limit, arrived in the mail. She used it a few times to buy snacks, a dress on sale, and a gift for a friend. When the bill arrived, she paid it from her allowance.

    Alice enjoyed "not worrying about money" and bought more items the next month, including a small television set for her bedroom. When the credit card bill came, Alice was surprised to see that she'd spent far more than her allowance would cover. She paid what she could, but the interest that would be due the next month made her payment seem small compared to what she still owed. It meant less time for friends and her schoolwork, but Alice got a job at a video store so she would be able to pay off the card. She also bought several videos with her store discount and then a VCR for her room. Soon her wages were less than her credit card debt each month. The credit card company had raised her limit to $1,000, and she had quickly spent it. Alice believed she'd never pay off her debt. She began to pay the minimum amount required by the credit card issuer and didn't look too closely at the interest charges and additional purchases recorded on the bill each month. The need for a job became constant, even though she was living at home and her family was meeting her basic needs. When she was not accepted to her first-choice college, she briefly remembered the evenings and weekends at her job and the times she had been too tired to study or pay attention to an assignment. By the time she graduated, Alice realized that she would be unable to participate in a summer music festival unless she quit her job, and if she did, she would not be able to pay her credit card bill.

   Alice had been trapped by credit card debt almost before she knew it-in a few short months. Many individuals and families have the bad habit of living with debt. They talk about getting out of debt, but they don't. Sometimes they lose opportunities, as Alice did when she missed the music festival, or are forced to continue in a job rather than seek training for a better job. They are slaves to their debts just as certainly as if they wore plastic shackles connected by magnetic strips.

   The following pointers will help you avoid debt, or tell you if you're trapped (you probably know) and how to break free. Of course, it would be better not to get into debt in the first place. Here are some ways to avoid debt:

1. Pay cash for as many things as possible. Use the envelope method-label envelopes for specific expenditures, such as entertainment, food, gasoline, and clothing. Then put money in each envelope (enough money to meet the expense for one week) and take money from the envelope for each expense as it arises. When there is no more cash in a certain envelope, there's no more money for that type of expense. You can't move money from one envelope to another. If you can't pay cash for something, you either don't buy it or you delay the purchase until the relevant envelope has more money in it next week.

2. Reduce your living expenses. In general, most families could reduce their living expenses each month by 10 percent without anyone noticing the difference. For instance, you could make nine trips to the supermarket during a month instead of ten, do eighteen loads of laundry instead of twenty, and drive nine hundred miles instead of one thousand. Similar savings can be achieved by turning off the lights or TV when you leave a room or by preparing a few more casseroles and meals that use items on sale and in season, rather than habitually preparing expensive cuts of meat. Use unit pricing to find the best prices on groceries. Foods that are prepared, "convenience," and "instant" almost always cost more than food you prepare yourself. Make a large batch of oatmeal and heat a bowl each morning rather than buying instant oatmeal in envelopes. Buy a turkey ham and cut slices for sandwiches all week rather than buy lunch at work or school. Drink water instead of soda, coffee, tea, beer, or liquor. If you smoke, you can save a lot of money (and your health) by quitting. Cable TV, cell phones, custom telephone features, eating out, excessive snacks, long-distance calls, unnecessary subscriptions, take-out or delivery dinners, Internet hookups, and so on are examples of conveniences that you may be able to cut back or do without. Instead of purchasing books or renting videos, see what's available at the public library (where computers are available for Internet research). Instead of going to evening movies, go to daytime matinees. When you can, buy clothes that can be washed, rather than dry-cleaned. You can also cut expenses by increasing the amount of the deductible on your insurance policies.

    In cutting your expenses, however, do not leave yourself open to financial and personal disaster. Premiums for health insurance, liability insurance for your car, homeowner's or renter's insurance, and preventive medical care (dentist, eye doctor, physicals) are an investment in your security and peace of mind. Further, neglecting to pay for these things is irresponsible to yourself, your family, and those who may be affected by your actions.

3. Stop going into debt. The first step toward getting out of debt is to stop walking further into the credit trap. If you're already in debt, don't make it worse. Too many see something they want and buy it. To get out of debt, you must stop spending money that you don't have and buying things you can't afford.

4. Getting out of debt. Once you have stopped increasing your debts and you have some extra money from reduced spending, you are ready to start paying off your debts. Eliminating debts is not the same as managing them. Debt management is used to reduce the amount of your monthly payments by refinancing old loans, consolidating a lot of little loans, or arranging to defer current loan payments. These actions may give you a little more time but they do not get you out of debt. Debt elimination is the action you take to get out of debt.

    One of the more effective ways to eliminate debt is to increase the amount of your monthly payments-start an accelerated repayment plan. When you increase the size of your payment, all of the additional money goes toward paying off the loan's principle. The amount of the unpaid principle determines how much interest is owed each month, so the lower the principle, the lower the amount of interest you pay.

    An accelerated repayment plan can be especially effective for your credit card debts, car loans, and other contractual debts if you "fold down" your debts. First, you pay off one of your debts (use money from your income tax refund, garage sale, bonus, or reduced living expenses). Then apply the money that was used to make payments on the paid-off debt toward making larger payments on another one of your debts. For example, you may have been making a $40 per month payment on a washing machine, $80 per month on a credit card debt, and $240 per month on the loan on your second car. Using the fold-down plan, you pay off the loan on the washing machine, which frees up $40 per month. You then add the $40 to the $80 per month payments on your credit card debt. Once you have paid off your credit card, you then combine the $40 from the old washing machine debt and the $80 that had been used to pay off the credit card debt and begin applying an extra $120 to your monthly car payments.

    The total amount of your monthly payments will remain the same throughout this process, but you will save interest by paying off your debts earlier than if you'd continued making only minimum payments. Once you have paid all of your debts, you may want to continue to make the same monthly payment to your savings account, where the money can earn interest rather than cost you interest.

    After that, if you use a credit card, pay it off entirely each month, before you've been charged interest-but don't use your savings to pay it. Adopt a saying that, "In our family, we don't pay interest; we earn it."

    If getting out of debt seems impossible, you may be so deep in the credit trap that the steps described above, while helpful, don't set you free. Here are some signs that you have so much debt that you are in serious trouble, and what you can do to get help.

1. Spending to or beyond your credit limits. If you pay only the minimum amount due on your credit card each month, you are exactly the type of customer the credit companies want-you're paying them the most money by paying the highest interest. If you spend to your credit limit, the bank will probably increase it to allow and encourage you to borrow more money, which will have to be paid back, with interest. You might consider interest as money you've thrown in a fire, for all the good it does. The delusion that you can maintain your desired standard of living by paying for part of it with debt is really a nightmare-and it's time to wake up and begin living at a level you can support with your income. See "Reduce your living expenses," above, as a first step.

2. No money for emergencies. Do you have enough money in a savings account to cover all of your (and your family's) expenses for three months? That would be the ideal emergency fund. Your circumstances may not allow you to put that much money in savings right away. You can begin by saving three months' rent (or mortgage payments), three months' worth of utility payments, and so on, going down your list of priorities. No one should be one bad day away from being homeless. You should know where your next meal is coming from. You also need a fund for unexpected emergencies or opportunities, like repairing the car or traveling to a beloved relative's funeral. Remember, it is better to save even a small amount from each paycheck than to save nothing.

3. Not knowing exactly how much you owe. At some point, you may be in so much debt that you don't want to know how much you owe. Your guesses will be low and, if you were to add up the total amount of indebtedness, you'd be shocked. Only by studying the bills and reading the contracts for bank loans, car loans, and credit card bills can you show yourself the true picture. After you get an accurate total, figure out how long it would take you to pay off your debt at the current payment rate-and at an accelerated payment rate.

4. Making late payments or missing payments. Banks and other creditors regularly raise the penalty they charge for late payments. In some cases, the late charges are greater than the interest charges. Like interest, the late fees are like throwing money in the fire, because you receive nothing in return. If you have more bills than income, you are in financial trouble. Don't make things worse by ignoring your situation or borrowing money to pay your current debts. Contact your creditors as soon as you see that you are going to have trouble making payments or meeting the due dates. In some cases, payments can be deferred to the end of the contract, the original contract can be re-negotiated, or interest-only payments can be made until your financial situation improves. Immediately take steps to reduce monthly expenses, concentrate on meeting basic needs first and postpone the satisfaction of wants, and think of ways of bringing in some extra money: have a garage sale or sell a car, boat, collection, etc. Never use your "hopeless" situation as an excuse to blow big money on something you want-the satisfaction will quickly pass and your circumstances will be even worse.

5. Applying for additional credit cards. Many people apply for credit cards because they've "maxed out" the ones they have. Unless you're going to transfer the entire balance of your old card to your new card to take advantage of a low-interest offer-while you pay off the new card at an accelerated rate (and cut up the old one and close the account)-you're borrowing trouble. The interest rates and fees on the new card will inevitably go up after a few months of low interest. If you continue borrowing money, you will continue being in debt. Additional credit cards may be counted against you in a credit report or loan application because they are potential sources of debt. If you have more than one credit card, choose the one that costs you least, cut the rest of them up, and tell the issuers to close your account. Even if you still owe money on a card, you can cut it up and refuse to use it for additional charges.

6. Consolidating loans. There is a saying with respect to having financial difficulties: "Financial problems are usually behavior problems rather than money problems." This means that if the behaviors that got you into trouble before you refinanced your loans or consolidated your debts remain unchanged, it won't be long before your credit cards are once again at their limits and this new debt will be on top of the newly refinanced loans. Refinancing a loan usually means borrowing enough money to pay off the old loan and then spreading the new payments out over a longer time, at a higher rate of interest. By refinancing a loan, you will reduce the size of your monthly payments but you will pay more in interest. Keep in mind that interest payments are worth nothing to you-they could have been used to buy groceries but are not available because they're being used to buy money at a higher price than the money is worth.

    If you decide to take out a consolidation loan, you must cut up your credit cards. Because money means more to people than its actual value, you may want to discuss your spending behavior with a counselor at the government-funded Consumer Credit Counseling Service (in the Yellow Pages under "Credit & Debt Counseling"). Avoid for-profit credit counseling agencies-some may leave you without help and with another debt to pay. One non-profit organization that is available on the Internet is http://www.myvesta.org/ "the nation's only financial emergency room," where options are presented and counselors are available at no cost to you.

7. More than 20 percent of your take-home pay is used to pay debts. If your gross pay is $3,000 a month and your taxes and deductions come to approximately $1,000, then your take-home (net) pay is about $2,000. Twenty percent of $2,000 comes to $400, so if you're considering buying a car with a payment of $390 per month, that payment will use up most of the $400 that you can allocate to debt payments. You wouldn't want to add that to the stereo payments and credit card payments that you already have.

    More important, the 20 percent limit is not what you want to reach; it's something to avoid. None of us will ever be able to satisfy all our wants. Half the consumer goods being sold today did not exist ten years ago, and somehow we managed to get along without them. If you are foregoing necessities (food, a warmer coat, a visit to the doctor) because you've spent your money on things that aren't necessary (more fashionable clothes, CDs, snacks), then you should talk to a teacher, parent, or counselor about managing your money. Many parents repeat their parents' rule: "Use it up, wear it out, make it do, or do without." For a part of your life, that may have to become your rule, too.

8. Deceiving spouse about the amount spent or owed. The love and security found in a successful marriage are priceless. Undermining that relationship by lying about debt and expenditures puts money ahead of the marriage-and nothing (no-thing) is worth the loss of that good relationship. For example, Alice, whose debt history (above) started with one credit card, attended four years of college at a state school. Her parents paid for tuition, room, and board, and Alice worked part-time during the year and full-time during summers. Still, she was $12,000 in debt. When she met Matt and they decided to marry, she was afraid to tell him how much she owed. Alice was so unhappy during the first part of her engagement that she finally told Matt, "I wish I could tell you that I had $12,000 in a savings account, but instead, I have to tell you that I'm $12,000 in debt." Matt was surprised (as Alice had been when she totaled her debt), but he didn't break off the engagement as Alice feared. Matt and Alice talked with their parents and asked for their advice. They were leaving for graduate school in another state after the wedding, and their parents suggested they live in graduate student housing at the new university, where they could walk or take the bus to classes and other places they needed to go. Alice sold her car and was able to pay off a large chunk of her debt. More money was freed to pay the debt because she no longer paid for gasoline, maintenance, or car insurance. Although Alice had dreamed of a large, elaborate wedding, she agreed with her parents that neither they nor she could afford it. Alice was relieved and happy that her debt would be wiped out in two months, according to plan. The truth had been frightening for the young couple, but deceit could have caused a loss of trust and unbearable anxiety.

9. Debts are being turned over to collection agencies. If you begin to receive phone calls and letters from collection agencies, you are likely to be deep in financial trouble and you must act. Representatives of collection agencies may treat you as though you were dishonest and untrustworthy, but you should be as polite and responsive as you can. Usually the person who contacts you has no authority to negotiate, but you can ask to speak with someone who does-if such a person exists and you have a reasonable plan for making payment. At this point, however, it may be too late to negotiate. When the collection agency tells you that you have a certain amount of time to pay before they turn the matter over to an attorney, they mean it. Once the matter is in the attorney's hands, the costs to you automatically skyrocket. If all else fails, you may be faced with filing for bankruptcy. Any money or property that you turn over to others during the 90 days before you file for bankruptcy will be treated as though it still belongs to you. Bankruptcy allows you to keep a minimum of possessions. The court decides what you are capable of repaying. All attempts to collect are put on hold and your creditors agree to accept a lesser amount (like 30 or 40 cents on the dollar) as full payment of the debt. In return, you agree to pay this amount by making monthly payments over the next few years. However, personal bankruptcy is considered the debt-management tool of last resort, because of its far-reaching, long-term results. The bankruptcy stays on your credit record for ten years-some job and credit applications ask if you have ever filed for bankruptcy. You would find it difficult to obtain credit, buy life insurance, purchase a home, and sometimes get a job. Many creditors would require a cosigner or charge higher interest because of your poor credit history.

    Bankruptcy is not an ideal solution to financial problems, but it is better than giving in to complete despair. If your decision to file bankruptcy is accompanied by a firm, sincere resolution never to allow debt to become unmanageable again, then it can offer you and your family a fresh start and hope for a better future.

    The desire to have and do more things than we can afford is fertile ground for temptation by those who want to make money from our desire. If a family's finances are irresponsibly managed by placing wants ahead of needs, with careless use of credit and debt, and without long-term goals, in time the members of the family may wonder why they do not have money for a home, for educational expenses, for medical care, or for retirement.

    If someone walked up to you with handcuffs and said, "put these on, and I'll tell you what you can and cannot do until you find a way to get the key and take them off," you wouldn't do it. But every day, people eagerly bind themselves by contract to begin or continue earning money until they can pay, not only what their purchase is worth, but also interest and other charges for which the creditor gives nothing in return. Those people put themselves in bondage to a certain level of paid employment and may lose opportunities that they could have if they were free from the credit trap.

    Bernard E. Poduska is an associate professor in the School of Family Life at Brigham Young University and author of For Love and Money (Salt Lake City: Deseret Book, 1995). These suggestions and recommendations are based on ideas presented in Till Debt Do Us Part (Salt Lake City: Shadow Mountain Publications, 2000).

The Consumer Federation of America (http://www.consumerfed.org/) presents this thought-provoking information:

· Total credit extended (consumer debt and unused lines of credit) in the United States reached $3 trillion for the first time in 2000.

· Mail solicitations account for ¾ of all credit cards sold.

· Creditors' organizations succeeded in convincing Congress to change the bankruptcy laws in March, 2001, limiting eligibility for bankruptcy and raising the amounts that must be paid by the debtor (and decreasing the amount the creditors lose).

· Credit card issuers have especially targeted college students, many of whom know little about money management. Some students have to reduce their class loads and work part-time or drop out of school completely to work and pay their debts. A few students have felt so hopeless about their debts, they have committed suicide.