Consumer Credit
Consumer Credit

The single greatest financial problem that many people face today is not so much a lack of sufficient income as it is an overload of debt payments. Remember this cardinal rule of finance:


Answer this question: If your monthly consumer debt payments (loans, credit card debt, past due accounts) were only 20% of your take home pay, would you be on solid ground? If the answer is “yes”, then you are earning enough to live on. If the answer is “no”, then you need to earn more, or make cuts elsewhere in your budget (you DO have a budget, don’t you? Most people do not, and that is part of their problem. Most budgets can be trimmed by about 20% without much cramping of one’s lifestyle. You’d be surprised how much we all spend, carelessly, nickle and dime-ing ourselves to death.)

Assuming your debt payments are in excess of 20% of your take-home pay, let’s start from the top and begin bringing these payments into line. Bear in mind that a healthy budget is based on the 10-20-30-40 rule:

  • 10% of income should be paid to you, as savings and investment
  • 20% of income should be cover consumer debt (loans, etc.)
  • 30% of income should cover shelter expense
  • 40% of income covers medical, clothing, and other expenses

If shelter is more than 30%, the excess should come from the 40% for other expenses. It should NEVER come from the 10% you pay yourself.

Therefore, we will try to help you bring consumer debt to 20% of your income. The savings, shelter and other expenses are up to the individual.

In no case should consumer debt – loans, credit card balances, car payments, past due accounts – exceed 20% of your take home pay. So the first step is simple – figure out what 20% of your take home pay is. Multiply your WEEKLY take-home pay by 4.3 (the actual number of weeks in a month), then multiply that figure by .20. For example, if your weekly take home is $300, your monthly take home is $1,290. Multiplied by .20 and the amount available for consumer debt payments is $258 per month. This is ALL that you should be paying in consumer debt with this income level. (We will use this income example throughout this manual.)

Before proceeding, it is important to understand your creditors and their needs. Most are more than willing to work with you, provided you communicate with them. Talk to them – tell them what you are doing, why, how and that you are trying to remain solvent for everyone’s benefit (if you go bankrupt,they lose, too.) Keep them up to date of any changes in your financial status. NEVER leave them to “wonder”, because they will assume the worst.


If you suffer from major credit card debt, you must reduce it. Credit card debt is the most expensive and most destructive type of debt. It is also the most difficult to reduce. Here are some suggestions:

Call your credit card company and ask to have the interest rate reduced. About 1/2 of those who ask, actually get the rate reduced by up to one-third

If you own a home, consider an equity loan to pay off your credit cards and other debts. The interest rate will be lower, and the payments spread out over years, reducing the payments considerably.

If you do not own a home, consider a bank loan for debt consolidation.

If these fail, try to locate a low-interest credit card. Apply for it and transfer all other credit card debts to it. This will consolidate your debts, and reduce the cost of interest, which is the real problem.

The last known way is hard to do, but if all else fails, you MUST do it, no matter how much it hurts. It is a two-step plan:

1) Put away all credit cards. Do not use them again until you have your debt under control.

2) Pay $25-$100 per month OVER the minimum balances, every month. This is the ONLY way to reduce credit card debt and avoid the high interest charges.If you have to go without a few things, or alter your lifestyle for now, then do so. If you need a temporary second job to do it, then do it. Whatever it takes, it MUST be done. This is the HARDEST part of reducing your debt. After this, the rest is easy.

The first thing to note is that you must come up with a viable, fair plan for paying off all creditors in an equal manner. Otherwise, they will refuse to cooperate. With a solid plan, they will see that you are being financially responsible. Your plan will be nearly identical to that which a Chapter 13 bankruptcy court would order, without the stigma of a bankruptcy on your record.

Get out pencil and paper – you’ll be doing some math. Ready?
Now, list all your consumer debts, including any PAST DUE amounts on utilities, etc. Although utility bills are not consumer debt, they BECOME consumer debt when the balance is PAST DUE.

Your list should include (a) the creditor’s name, (b) the monthly payment,(c) the number of payments remaining, and (d) the TOTAL amount owed on each debt.

At the top of the page, write down the TOTAL of all monthly payments. (If you have PAST DUE accounts, the total due on each one should be divided by6 to determine the monthly payment on that balance, as all past due’s should be paid up within 6 months. The total of these payments should be included in the TOTAL of all monthly payments.)

Now, write down the amount you have available for consumer debt (20% of monthly take home pay). DO NOT INCLUDE INCOME YOU CANNOT COUNT ON, such as alimony, overtime etc.

Now, subtract the TOTAL OF MONTHLY PAYMENTS from the TOTAL OF MONTHLY INCOME available for these payments. If you have enough to pay the payments, then the consumer debt part of your budget is in order. Your financial difficulties must be coming from elsewhere. If, however, the answer is in the negative, then the payments must be reduced, and here is how we will do that.

Determine what percentage of your total consumer debt is represented by each payment. For example, if your total monthly consumer payments is now $300 and the debt payment to Sru-em Finance is $75/month, that payment represents 25% of your monthly debt ($75 divided by $300 = .25) Use this formula to determine the percentage that each payment represents of the total. Write each percentage next to the name of the creditor on your worksheet.

Now, multiply each percentage by the actual amount available for consumer debt (the 20% of take home pay) to determine the amount you SHOULD be paying on each debt every month. For example, using the income example shown earlier that allows $258/month for consumer debt, the amount you SHOULD be paying Sru-em Finance is $64.50/month (25% of $258) Write the adjusted amounts beside the name of each creditor. In the event that a payment is already smaller than they should be, that’s great! Just leave it as it is. This will leave you extra money in your pocket every payday.

You should now have a list of your creditors, how much you are paying them, what percentage their payment represents of the total, what you have available for debt and how much each payment SHOULD be for you to become financially sound. Believe me, your creditors want you to be on solid financial ground as much as you do. That is the only way they can get paid AND perhaps get more business from you in the future.

Add all the amounts you SHOULD be paying. The total should not exceed the 20% you have available. Now, we have to get your creditors to accept these payments. Remember, they want you to be on solid ground. They want to get paid. They want to know that they are being treated fairly with all other creditors – no favoritism. That’s why you will neatly type up the schedule that you now have, showing each creditor your plan to repay everything, treating each creditor equally. Most, if nor all creditors will accept your plan, as it shows responsibility and a willingness to communicate with them. For those who do not accept it, there are ways to deal with them.

Contact each creditor whose payment must get smaller. See them in person, by appointment, and go over the schedule. Let them know you are sincere,and that you will make each payment in a timely manner each month, AND KEEP YOUR WORD! If your plan is solid, workable and fair, you should have no problem,and your debt payments will be reduced to the 20% level almost immediately.

If you run into a hard-nosed creditor that won’t budge, remind him that if this plan cannot be followed, you will have no choice but to file bankruptcy, and he will get little or nothing. They will also lose a future customer forever. If this doesn’t soften them up, don’t worry. There are still ways to deal with them. Simply send them a letter similar to the one that follows, send via Certified Mail, Return Receipt Requested (remember to keep a copy for your records in case you have to prove you made reasonable efforts to work with the creditor. It is rare for a court to find fault with a well-planned schedule of repayment that is equitable for all creditors):


Scru-em Finance Company
13 Lost Buck Lane
Wastemoney NY 11111

Re: proposal offered on 10/09/03 (copy enclosed) Acct. # 34567-A

Dear Mr. Buckgrabber:

Due to economic stress in my finances, I requested your cooperation in adjusting my payments to you to be more in line with my income, as indicated in the enclosed copy of the schedule. Without full cooperation of all creditors I will become insolvent, and all my creditors will lose.

The plan I submitted to you is fair and equitable to all parties concerned. Still, you have refused to cooperate in this matter.

Although I understand your position, I must take whatever steps are necessary to protect the interests of both my family and my other creditors that have agreed to accept the new payment schedule. I cannot permit one creditor to place me into insolvency so that all others are jeopardized, nor would it be fair to pay each of them less than a fair share simply because you insist on preferential treatment and exception to the plan. Therefore, I have decided to implement the plan in its entirety, as written. You will receive $______each month for ____ months until my entire indebtedness to you is paid in full in accordance to the plan. At that time, all my business with your company will cease and not be renewed at any future time.

I realize that you may take legal action in this matter, but my records and copies of all correspondence with you in this matter will prove to the courts that I am acting responsibly, and with justice.


(name and address)

There is also another useful method – I showed this system to my brother-in-law and he was able to eliminate all of his debt within 4 years. It goes like this:

Choose the SMALLEST debt you have. Do whatever you must in order to pay it off in full, now. Have a yard sell, sell excess stuff on eBay – whatever. Just pay it off. When you do that, you would then apply the amount you were paying on that debt each month, and add it to your payment on the next smallest debt.

When that next smallest debt is paid, you would then take the combined amounts you were paying on both those debts, and add it to your payment on the next smallest debt.

Continue until all debts are paid.

The beauty of this system, other than its simplicity, is the same secret that makes compound interest so great. At first, you will see little change. But as each debt gets paid off, it begins to snowball.

EXAMPLE: Your smallest debt is $800, and you are paying it at the rate of $40/month. By paying that off, you now add $40 to your monthly payment of $80/month on a debt of $3,000. So, you are paying that debt off at $120/month. Once paid, you can now apply that $120/month to your next bill, which might be $280/month for your car. At that rate (paying $400/month), the car will be paid off in no time. And now you have a whopping $400/month to apply toward your next biggest debt. Imagine – if your next biggest debt is your house, you could even get that paid off quickly by adding $400/month to your regular payment.

Simple, yes. But it works!

This should take care of your consumer debt difficulties.

Until Next Time,

God Bless.


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