So when we left last time I was telling you about how one late payment triggered an avalanche of interest rate increases on several of our credit cards. We went from managing to get by with our credit card debt to struggling in a blink of an eye. All over one payment that was 5 days late! I mean, can you imagine if we had a family emergency? There was a time when companies looked at your payment history and understood that life happens, but not anymore. They smell money and they come running! Anything to make a dollar for them and take one away from you!

So now that our interest rates were approaching 20% we thought that we could manage, but we soon found out otherwise. You see now most of our payments we were making for the cards were going to the interest. The balance would drop maybe $100 for every $400 payment we made. The rest was being eaten up in interest! One card we owed $12,500 on and they raised our rates to 21.95% and finally to 29.95%. I calculated that by making the minimum monthly payment on that card (which was $424.07) it would take 36 years to pay it off!

IT WOULD TAKE LONGER TO PAY OFF THAT CREDIT CARD THAN IT WOULD TO PAY OFF MY 30-YEAR MORTGAGE ON MY FIRST HOUSE AND THE PAYMENT FOR THE MORTGAGE WAS ONLY $50 MORE!

It was amazing. We had always paid our bills on time and tried to maintain a good credit score, but now we were faced with a mountain of debt that was being fueled by interest rate charges.

Of course, we know that we had nobody to blame but ourselves. However, it was clear to us that the credit card companies were taking advantage of the situation. They waited until the time was right to pounce.

So what do you do when facing this type of debt? It isn’t easy, but there is a solution. It starts with putting down the credit card – that is the hardest part for many of us (it was for us!). Then it starts with you sitting down and examining how much debt you have and where it is owed. Here is a handy chart of debts that you might owe and in what order you should pay them. I’ll explain the reason for the ordering in a minute:

• Mortgage Payments
• Student Loan Debt
• Car Payments
• Credit Card Debt

First and foremost, almost pay your mortgage payment. Scrape, save and get a second job – but don’t miss that payment. It’s your house you are talking about after all. Cancel the cable TV and start walking to work if you have to before you miss that mortgage payment!

Some people are surprised I put student loan debt next, but here is why – even bankruptcy will not release you from repaying most student loan debt! Now the good thing is the student loan people are the ones who are most willing to work with you through hard times. Call them up and explain your situation – you’ll find they have a variety of programs to help you out.

Car payments are next, but if you have more than one car you need to get rid of the extra one. You don’t need a car for each family member. Ride the bus to work, or walk. You’ll not only save on gas but you will get exercise in the process!

Last, and I do mean last, is credit card debt. I’m not saying don’t pay it, but when push comes to shove it is the last debt on the list because it is unsecured debt. Sure, they can sue you, but if I had to choose between losing my house and being threatened by a credit card company I’ll take the latter! [Note from Jonathan: Credit card debt is unsecured, but it’s also typically the highest interest. Keep that in mind.]

I want to emphasize though that you should do everything in your power to make arrangements with the credit card company when you can’t meet a monthly payment. Don’t just let it lapse! As greedy as some of them are, they are willing to work with you in most cases. After all, it costs them far more to sue you than it does to make arrangements with you.

So now that I’ve talked about how we got into debt and what happened to us – let’s talk more about what we did to get out of debt. Keep reading on to see how we are working to turn our financial situation around.