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How one couple faced reality and paid off debt

Underestimating credit card debt can lead to more dire financial situations in the future. This American couple expected to make more money in the future and be able to pay off their debt, but it took a reality check before they were able to face their situation.

How much credit card debt do you have right now? First, come up with an estimate. Then, get your actual total from your current statements. Chances are, your estimate will be well below your actual total.

If so, you鈥檙e hardly alone. On average, Americans underestimate their credit card debt by 37%, according to a聽聽by the Federal Reserve Bank of New York. In other words, they owe much more than they think they do.

The study suggests that consumers may be in denial about their spending. That was the case for Denver couple John Schneider and David Auten. The men started getting into trouble with credit card debt long before they met in 2001, and ended up owing about $51,000 between the two of them.

But in time, the couple recognized their denial, faced聽reality and mustered the self-discipline to pay off their credit card debt. They told the Nerds about聽some of their denial tactics and how they overcame them. Their story may help you do the same.

Rationalizing you鈥檒l earn enough to pay it all off

鈥淥ur main denial tactic was that we thought we鈥檇 eventually make enough money to pay off our debt,鈥� Schneider says. 鈥淲e were young with wealthier days ahead.鈥�

They racked up debt on both big-ticket items and trivial purchases. Though they worked in the financial services industry, 鈥渨e didn鈥檛 realize we were anchoring our future success to our past with worthless credit card purchases,鈥� Auten says.

Recommendation: Take stock of expenses and find ways to cut costs. Auten used an Excel spreadsheet to categorize their expenses, targeting areas where they were overspending or spending needlessly. They cut back on spending and then used all of the cash they saved to pay down their debt as quickly as possible.

Making only the minimum payments

Many people who build up too much credit card debt mistakenly believe they鈥檙e doing OK if they make the required minimum payment each month. Low minimum payments make it easier to slide into or sustain high debt levels, and give unwary users the impression that they have more money than they actually do. 鈥淚 felt as though I had a fortune in the bank,鈥� Schneider says, describing his days of consistently making just the minimum payment.

However, the minimum payment typically covers only the interest you owe and a tiny percentage of your principal balance. So although聽you may feel safe by making affordable payments on time, monthly minimums can easily become overwhelmingly high as your balance increases. It may take years to pay off that balance, especially if you鈥檙e racking up interest charges all the while.

Recommendation:聽Consider making it a goal to pay your credit card balances in full every month. If you鈥檙e unable to do so, increase your payments incrementally while cutting back on card charges to prepare yourself for聽paying in full. Can鈥檛 resist charging more each month? Cut up that card, get on a payoff plan and stick to it.

Maxing out your cards

If you鈥檙e regularly bumping up against your credit limit, it may be a sign that you鈥檙e living beyond your means. Though Auten was supposed to use his first credit card only for emergencies, he quickly spent up to his credit limit and kept his balance there. When his credit limit was doubled, his spending rose with it.

Maxing out your credit cards not only hurts your credit score because your聽聽is too high, but it can also make it difficult to keep up with payments.

Recommendation:聽Set a goal to pay off your balances by a specific date. Consider using a聽to take advantage of a 0% APR period to pay off your debt interest-free. Balance transfers do usually carry a one-time charge, typically 3% of the amount transferred, but it still may be worth making the switch聽if you owe enough. Just do the math showing what it will cost you to maintain the debt versus paying the one-time charge.

Repeatedly transferring your balances

Schneider and Auten are like millions of Americans who have struggled with debt denial. 鈥淚 recall one person who thought they could outsmart the creditors by playing the balance transfer game,鈥� says Bruce McClary, vice president of public relations and external affairs for the National Foundation for Credit Counseling. 鈥淭hey started with a couple of credit cards that seemed manageable at first, but became more of a problem as the balances crept closer to the credit limits.鈥�

Instead of seeing it as a sign that the person needed to pay off the debt, McClary says the client applied for new credit cards with low introductory APRs, transferred the balances to new cards and continued spending as usual. Soon the minimum payments became too much and the individual sought credit counseling. And atop this mounting debt came the balance transfer charges.

Recommendation:聽Balance transfers are a great way to consolidate your high-interest credit card debt, but the Nerds recommend using them聽only if you have a plan to pay off the debt, preferably before the introductory 0% APR period ends. Using them聽the way聽McClary鈥檚 client did聽can put a strain on your finances and can leave you with late payments, delinquencies or collections.

Bottom line: Act promptly

Denial is often a way to cope with distress, but it聽can turn a stressful financial situation into an overwhelming聽one. Many people don鈥檛 start making changes until the pain of the problem becomes worse than the pain of the solution.

Schneider and Auten carried balances on their credit cards聽for聽eight years and 17 years, respectively. Once they had their aha! moment, it took two and a half years and all their extra cash to pay it off. They haven鈥檛 calculated how much interest they paid over the years, but the emotional toll was heavy, including聽anxiety and depression.

Now debt free, Schneider and Auten live well below their means and use cash to avoid overspending. Through public speaking, social media and their blog,聽, they use their experience to help other people get out and stay out of debt.

When asked what they would tell their former, indebted selves, the two agreed: 鈥淚t鈥檚 not how much you make, but how much you save and invest. Yes, you both went to college to make as much money as you can, but even 鈥榬ich people鈥� drown in debt.鈥�

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