Your Money_ The Missing Manual - J. D. Roth [30]
After you destroy your cards, halt any recurring charges. If you have a gym membership, cancel it. If you automatically renew your World of Warcraft account every month, cancel it. Cancel anything that automatically charges your credit card. The point is to completely stop using credit.
Once you've done this, you'll need to decide whether you're going to close your credit card accounts or leave them open. If you try to cancel a card that has a balance on it, the issuer may want to jack up your rates or do other evil things. Plus, it'll ding your credit score (see How and When to Cancel a Card). But so what? If you have trouble with credit card debt, you've got to remove the temptation; if you don't close your account, you can still use it to shop online even if you've destroyed the card. Besides, when you call to close your account, some card issuers will let you lock in a lower rate by putting you on a payment plan.
If you simply have to leave your account open, then ask for a better deal. Find an offer online to use as a bargaining chip. When you call, say something like this:
"Hi. I was just browsing online at CardRatings.com and I see they have a card from [Other Bank] that has an APR of just 10%. I'm paying 18% APR on the card I have with you. I'd rather not switch, but 8% is a lot. Is there anything you can do to help me out?"
Your bank may not agree to match the terms, but then again it might. You'll have better luck if you've been a long-time customer, paid on time, and used the card regularly. Be friendly but insistent, and don't make any threats you're not prepared to follow through on.
Establish an Emergency Fund
The next step is to sock away some savings. Use that positive cash flow you're building to set aside a little self insurance, money you keep on hand in case of emergencies. This helps you cut costs because it's cheaper than paying an insurance company to handle unexpected catastrophes. (See General Insurance Tips for more about self insurance.)
It may seem counter-intuitive to try to save up a little bit of money while you're still in debt, but if you don't save before you begin paying down debt, you'll struggle to cope with unexpected expenses.
Tip
Whatever you do, don't use a credit card to pay for emergencies; a credit card is not an emergency fund. Instead, destroy your credit cards and save for emergencies.
How much should you save? Ideally, $1,000 is a good amount to start with. (If your expenses are low, you might be able to get by with $500.) Keep this money liquid, but not immediately accessible. In other words, make it easy to get to—but not too easy. Don't keep your emergency fund in your main checking account, for example; consider opening a separate account at a new bank. (Chapter 7 has tons of info about bank accounts.)
Don't tie your emergency fund to a debit card; that just makes it easier to sabotage your efforts by using the debit card to pay for non-essentials. This money is for emergencies only, not for beer, clothes, or a new iPhone. It's for when your furnace croaks or you break your arm or you lose your job.
A good option is to open a high-interest savings account at an online bank like ING Direct or HSBC Direct. (For a list of online banks, check out http://tinyurl.com/savingACT or flip to Online banks.) That way, when an emergency arises, you can transfer the money to your regular checking account. It'll be there when you need it, but you won't be tempted to spend it rashly.
Frequently Asked Question: Is There Such a Thing As Good Debt?
Some experts, like Dave Ramsey, argue that there's no such thing as a good debt. But most financial gurus agree that certain debts make sense.
As a general rule, you shouldn't borrow money to buy things that are likely to decrease in value. That means you shouldn't buy your new plasma TV on credit—next week, it'll be worth less than you paid for it. Nor should you go into debt to buy food, clothes, or computers.
But many experts say that