Battling Debt: From Big Challenges Come Big Changes

It’s More Than Money

For all three participants, taking steps to reduce debt had important, unexpected impacts on their families. After Penny learned she’d won a chance to participate in the Debt Diet Challenge, it took her a week to work up the courage to tell her husband. An avid hunter, he had a habit of coming home with new guns and hunting bows, some of which he bought on credit.

“I thought he’d be mad because it would mean we’d have to account for our money,” Penny says. “He feels he worked for 36 years, and if he wants to buy something he should be able to.”

But that mindset had thoroughly trashed the couple’s credit ratings, even though they were earning over $80,000 a year before Penny’s husband retired a few years ago. Now they find themselves in a tight spot. They bought a house and 16 acres of land on a five-year mortgage that has a big balloon payment coming in 2013. They hope to refinance, but with credit scores hovering around 600, their chances seemed of finding a better loan seemed to be dwindling.

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“My main concern is that I don’t want to be homeless,” Penny says. “I want to be able to live here the rest of my life.”

Instead of being mad, her husband agreed that the Debt Diet was a great opportunity. Now instead of buying guns on layaway, he consults with Penny, and helps her avoid spending money unnecessarily.

“It’s brought us closer because we talk about stuff beforehand,” Penny says.

The same ultimately became true for Melissa and her husband, though her process was much more tumultuous, she says. Both of them would criticize what they saw as the other’s needless spending, even as they continued to buy some of the things they wanted.

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“We fought more about money, especially in the beginning” of the challenge, Melissa says. “We would fight about him spending any money at all. I had to back off, because that’s not realistic.”

The transition was smoother for Chris, maybe because she isn’t married. But her new commitment to reducing debt did change some of her family dynamics, too. Her daughter, who attends Iowa State University, had grown accustomed to getting a little help with her finances now and then.

“She had to learn that she couldn’t keep coming home and grabbing cash,” Chris says.

Why Charge it When You Can Pay Cash?

One other thing that all three Debt Diet Challenge participants shared was the habit of reaching for their credit cards or asking for bank loans instead of paying with cash. During the first week of the challenge, Chris was hit with a double-whammy: Her home air conditioner died, and the city informed her she needed to fix her crumbling sidewalk. One contractor estimated the sidewalk repair would cost $2,500.

So she improvised. She used a combination of gift cards and cash to buy a small window A/C unit. She shopped around until she got a bid for $830 to repair her sidewalk, and now she’s saving money from a few months’ worth of paychecks so she can pay the contractor in cash.

“Before, I would have just charged it on a card, and try not to look at all the interest I’d be paying,” Chris says.

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Penny had a number of credit cards, most with low balances but high interest rates, including one with an APR of 28 percent. She had been making more than the minimum payment every month, but never enough to pay any of them off, and she kept using each one to rack up new expenses.

With Chatzky’s advice, she dropped her payments down to the minimum on most of her cards so that she could concentrate on paying off the one with 28-percent interest entirely. The card had a $1,900 balance at the beginning of the Debt Diet Challenge, and by October she paid it off. She followed that by paying off the entire balance on a card with a 24-percent APR, and next week she’ll pay off a third card, which has an interest rate of 22 percent.

She also removed the cards from her purse.

“It was scared to do that at first, but now it works,” Penny says.

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Melissa hasn’t been able to dump any of her cards yet. Her balances are too high to risk consolidating them into a new, zero-interest card, since she might not be able to pay them off before the interest-free teaser period ends. So she’s focusing on paying them down, starting with the one with a 15.9-perent interest rate.

“You really have to look at everything and study it,” Melissa says.

Time for Some Big Changes? »