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Is credit counseling for her?
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November 13, 2000: 6:04 a.m. ET
An educator looks to learn how to free herself from a monthly payment grind
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - Kristen Douglass sometimes lets her spending get the better of her. "I know I get myself into trouble," Douglass said. "There's the thrill of having what I want when I want it with credit cards."
 She struggles under $20,000 in credit-card debt and a $6,000 student loan. Douglass, now 26, says she was "seduced" by plastic in college. She has bridled her spending, but it still occasionally gets the better of her.
All her debt has led her to contact a credit-counseling service. "I want to do something to help myself but I don't want to ruin my credit worse than it already is," she says. Is credit counseling the way to go?
Occasional splurges weigh her down
 Douglass lives in Rock Island, Ill., where she's assistant director of student affairs at Augustana College. She teaches aerobics on the side.
"I love what I do, but it also required me to relocate and get an apartment and furnish it," she said. "Of course, I financed it."
No interest for a year seemed a good deal. She told herself she'd afford the furniture in a year. Deep down, she knew that wasn't true.
She took a trip to Hawaii this June to visit a friend from grad school. Now she regrets it. She didn't really have the money. Then again, with someone to stay with, her costs were low once she got there.
College affairs when the chemistry isn't right
Douglass grew up in Kettering, Ohio, a Dayton suburb. She was very involved in student government in high school and at Hope College in Holland, Mich.
She wanted to be a doctor at first. "It was sophomore year that I realized organic chemistry just wasn't working for me," she recalls.
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But while helping with orientation and concert planning, she discovered college affairs could be a career. Douglass majored in communications, then got a master's in education, focusing on college-student affairs, from nearby Grand Valley State.
She moved to Augustana this year. "It's a very rewarding, fun job," Douglass said. "I like having a project like homecoming or putting on a dance marathon or a heart walk, that I can accomplish and feel proud that it was done well."
Live boils down to milk and eggs
Douglass knew she'd never be rich in education. But she didn't think it would be this bad.
After her $450 rent, utilities, student loan and car costs, she tries to pay $10 more than the minimum to each of her cards. But it leaves little else.
 She budgets $100 a month for groceries. She puts her cash into five envelopes, for different expenses, and only spends what's there.
"I don't even remember the last time I had a real grocery trip for anything other than milk or eggs or anything 'necessary.' It just seems that I always end up short every month."
Douglass thought the credit-counseling service would be a cheerleader. It was the opposite.
For a monthly charge, the service would negotiate with her creditors, lower her interest and get her debt-free. But her credit would be ruined for four years, she heard.
She isn't sure she wants that. "Right now my credit isn't bad," she pointed out. Then again, she noted, "I can't do anything I want to do."
What the planners say:
Douglass is hardly alone in leaving school with large debts, David Bergmann said. The good news is that Douglass has a graduate degree, which should lead to higher income, and knows she needs to get a handle on costs.
Douglass has created a spreadsheet for her budget. Bergmann, a certified financial planner in Marina del Rey, Calif., said that's a good start.
The bad news is that the credit counselors have a point, he said. Carol Lee Royer, a certified financial planner with Waddell & Associates in Memphis, Tenn., agreed. She's not surprised they were harsh.
"When you're making $27,500 and owe $26,000, mostly in high-cost credit card debt, you need a wake up call," she said. "The obvious common sense solution to this predicament is to spend less than you earn!"
All out attack
But Royer thinks Douglass can get by without the credit-counseling service, if she has really changed her ways.
She could call all her creditors, point out her good history, promise full payment and request a lower interest rate. A counselor would likely do that, but she could do it herself and might be pleasantly surprised, Royer said.
 The planner points her to the Fannie Mae Foundation's brochure "Knowing and Understanding Your Credit." It's excellent, Royer said, free on its Web site and addresses her problems. The National Endowment for Financial Education also has a useful Web site, she said.
Next, Royer advises Douglass to list her debts, with the balance owed and the interest rate. "While making minimum payments on the rest, attack with a vengeance the most-expensive debt," Royer said.
This might help her adjust mentally, she said. Instead of an 'I'm never going to get out of this' attitude, she needs to take an 'attack the enemy' approach, Royer believes.
Areas to adjust
Of course, Douglass has to moderate her credit-card use, Bergmann said. He has some areas for her to adjust.
Douglass pays $50 a month into an SRA, or salary-reduction annuity. Though Bergmann said it's important to save early toward retirement, he suggests she stop that until she knocks out her credit cards.
"You are paying debt-carrying charges that exceed what you are probably earning in the SRA," the planner explained. What's more, Douglass has no emergency reserves.
If she had a disaster, she would have to withdraw retirement money and pay a penalty. But if she pays down her credit, she could use her cards to cover emergencies, he said.
Too much tax?
Bergmann also believes Douglass may well be withholding too much tax. Most student loan interest is tax-deductible, as long as it is not more than 60 months old.
On her payments of $221 a month, she could claim around $600 against her adjusted gross income this year, he figured. Then she'll be paying $2,816 in federal tax for 2000, plus 3 percent Illinois tax.
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She could reduce her withholding by $52 to $60 a month, he said. Douglass also spends $70 a month in education costs. She could probably claim the lifetime education tax credit, Bergmann said. That gives her a dollar-for-dollar credit of 20 percent of the cost, up to $5,000. She would save $14 a month.
Douglass is paying 16 percent interest on her cards. So she would need to pay $509 a month to pay off her debts within five years, Bergmann figures.
That's more than the $400 a month she pays now. But if Douglass could consolidate her debt at 10 percent interest, she would pay off her debts with $440 a month for five years.
Banks such as the Pulaski Bank & Trust, Federal Savings Bank, Metropolitan National, and CapitalOne all offer cards at that rate, Bergmann said. But she should check the annual fee, to ensure her savings aren't eaten up, he added.
Scrutinizing her car costs
Douglass pays $206 a month for her Saturn. Bergmann recommends that she check at work to see if her credit union can get her a lower-rate car loan.
He suggests that she analyze her auto insurance, too. She should price her policy online with sites like InsWeb and eCoverage, he said. She might find the same coverage at a lower rate.
She could also save money by raising her deductibles, he said, or "co-insuring" herself, taking a policy covering 80 percent of accident costs, perhaps. She would need to decide what risk she can stand, he said.
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If Douglass can start killing off her most-expensive debts, she'll get a lot of satisfaction, Royer said. Once she adjusts to more-modest spending, she'll be in a position to save.
Royer recommends that Douglass consider getting a roommate to split her rent. She could take lunch to work. She could cut back some services like cable TV.
"Fortunately, she has youth on her side," Royer said. "Now is the time to tackle the bad habit of debt in her 20s, so that she can begin to accumulate savings and a retirement fund in her 30s."
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