Wall Street Journal Sunday
Debts
Struggling With Credit-Card Debt
July 8, 2001

Lori Cook remembers the moment she realized she had a debt problem.

She and her husband, Ed, were sitting in a credit counselor's office two years ago, staring at nearly $26,000 in credit-card debt. But it wasn't that staggering amount that shook up the Denver nurse, now 36 years old. It was the counselor's remark that the Cooks "wouldn't be making it" without their 11 credit cards.

"I had definitely been in denial," Mrs. Cook says now. "I'd always just thought, 'With the next paycheck, I'll get the bills caught up.' It was a numbing experience."

The Cooks have plenty of company. Even with the economy slowing, Americans continue to rack up credit-card debt. Last year, this debt averaged over $8,000 a household, up from nearly $3,000 a decade ago, according to CardWeb.com, which tracks the credit-card industry.

How the Cooks got into debt trouble -- and how they've begun to climb out --offers lessons for any family struggling to keep control of its finances. Though the Cooks may be an extreme example, their attitudes toward debt are surprisingly common.

"The first step is to recognize you're in trouble," says Ken Scott, a spokesman for the National Foundation for Credit Counseling, a large nonprofit debt-counseling service. "If you can do that, then it becomes easier to change your habits."

Like many people, the Cooks got into trouble gradually. Mrs. Cook got her first credit cards after graduating from college in the mid-1980s, mainly "for things like hotel and plane reservations." But the debt soon started piling up. When she married Ed in 1987, the couple's combined credit-card debt was about $2,400.

Mr. Cook lost his job soon afterward, and decided to go back to school. With just one salary, the couple survived by using credit cards, paying the minimum each month. By 1991, their debt had risen to $5,000. Credit cards "helped us get what we needed," Mrs. Cook says. Then, after Mr. Cook got his degree and a new job, the couple moved to Phoenix.

"We were both finally making some real money," Mrs. Cook recalls. "It was like a euphoria-'now we've got some money, let's go out and spend it.'" In 1992, the Cooks bought a house. The following year they had a baby. They bought new furniture, expensive linens and baby clothes.

Their mistake was that "they didn't pay off what debt they had -- and they didn't create a budget," says Vickie Hampton, an associate professor of financial planning at Texas Tech University.

With the new baby, Mrs. Cook had to cut down on her work hours. A few years later another baby was born, and immediately developed health problems. Medical expenses piled up. The family took out a home-equity loan "to get a handle on our bills," but continued to use credit cards. The baby died after a 5 1/2-month struggle. The Cooks decided that they needed a new perspective after the family tragedy. They sold their house and left for Colorado.

"Most families can handle -- financially -- one setback," Prof. Hampton says. "But it gets harder when setbacks multiply," as they did with the Cooks.

The family bought a house near Denver in 1997. The bills by then were onerous --they owed more than $20,000 -- and Mr. Cook began to worry about the debt. But it was Mrs. Cook who ran the family finances and, while many people in this situation consider filing for bankruptcy, she believed she could work things out: "I would say, 'No, I can do this. Give me time, and I can get us out.'" It took another year before Mr. Cook convinced his wife they needed help. After one credit-card company raised its interest rate because of a late payment, Mrs. Cook took a hard look at the family's card rates averaging 22% and decided to call the local chapter of the National Foundation for Credit Counseling.

The debt counselor told the Cooks to bring their credit-card numbers and monthly statements with them. At a meeting, she made it clear that if they decided to go ahead with the program, they would no longer pay just the minimum balance on each card; instead they would have to pay a lump sum to the agency every month for three years. They could not default -- even once -- or they would be out of the program and on their own again.

"She told us, 'This is your debt, this is what you need to do,'" says Mrs. Cook. "You decide if you can do it.'" When the Cooks decided they could, the counselor then contacted the family's creditors and told them future payments would be handled by the agency. The first monthly payment -- $757 -- went to the agency a week later. The family was left with about $50 in a checking account. "We ate whatever we could find in the cupboard for a few weeks," Mrs. Cook says. "It wasn't pretty, but we had to do this."

Mrs. Cook's initial reaction was fear. "What if we need a new roof?" she thought. After fear came humiliation: "There's a certain pride in walking into a store and knowing you can pull out a card and buy a blouse you might see."

But the Cooks learned to save. They had to forgo vacations, get rid of cable TV and cut down on birthday gifts and groceries. "I've become a pro in the thrift stores," Mrs. Cook says. The family got letters from creditors, thanking them for their "decision to act responsibly."

Now the end is in sight. The Cooks estimate that by October, they will be completely out of debt-more than a year ahead of schedule. Once that happens, most creditors will reissue their cards. "My husband says we'll cut them all up again," says Mrs. Cook. Still, she plans to keep one -- just in case.

Copyright (c) 2001, Dow Jones & Company, Inc