How to live debt-free without credit cards

December 9, 2009 | By admin |

Credit card reform kicks in Feb. 22, but it won’t matter to these 5 readers. They cut up their cards and are going debt free. They share how they did it

Courtesy: William Hazelgrove

William Hazelgrove, 49, is a novelist who lives with his children, Clay, Callie and Careen, and dog, Bach, in St. Charles, Ill.

William Hazelgrove

Went cash-only: 4 months ago

My challenge: Tracking purchases

We were the quintessential American family: We were carrying $22,000 of debt. We would reach for our credit cards constantly, and eventually our interest rates went through the roof and our credit lines got restricted. We realized if ever wanted to live within our means, we’d have to switch to using cash only.

It’s been a sobering reality check since we come from a long line of people who relied on credit. We’re paying off our debt and realize it’s going to take a while to adjust, but already we feel more empowered. We own everything we buy, and we don’t feel like we’re skating on the edge of a cliff.

We use debit cards, so we’re constantly afraid of going over the balance because you can get slapped with service fees. Not all charges hit immediately so you’re constantly wondering if you’ve accounted for everything.

My solution: I try to keep my debit card balance above $100 at all times, and I keep a cushion of $5,000 in an account for emergencies. I keep every receipt and enter the purchase into Quicken. I download the debit card transactions online and check them with the receipts.

I think through the downturn, more and more people are realizing they don’t have a safety net. We’re all pretty much a few steps away from the guy who just lost his house. We’re our own line of defense.

We have a priority order for our expenses: mortgage first, utilities second, then food and medical bills. We’ve spaced out our due dates with the different bill collectors so we have some breathing room.

Courtesy: Brooke MacDonald

Brooke MacDonald, 28, is an account executive at a public relations firm in Annapolis, Md.

Brooke MacDonald

Went cash-only: 1.5 years ago

My challenge: Managing unexpected expenses

After I got my first job out of college, I bought a house and a car and the expenses added up quickly. I was in an embarrassing amount of debt and would dread going to the mailbox. The bills would arrive and I would feel sick. But I still wanted to go out with my friends and buy fancy things for my house.

I eventually had an “Ah ha!” moment and decided I couldn’t continue living that way. I wasn’t in such a bad position that I was getting calls from my creditors, but I enrolled into a debt-management program. They helped me lower my interest rates and space out the due dates.

I went cold turkey one day and instead of using credit cards, I started to charge all my purchases on a debit card. I’ve cut my debt by about 20% in the last year and a half, and I expect to be completely debt free in another two years.

I really budget everything out, because I know planning ahead is my path to financial freedom. But sometime it can get sticky. It’s cruddy when you have a big car service bill or want to travel.

My solution: I pay all my regular monthly bills and put some money into saving, and then see what I have leftover to do what I want with, which is usually about $600 each month.

I’ve known that I want to go to Los Angeles for the holidays for seven months, so I started saving for a hotel, a rental car and everything else back then.

For more spontaneous buys, I have a different system. If I decide I want to buy something, like a new outfit that costs $75, I set money aside for it for at least a week. If I decide it’s still important to me after that period of time, I buy it.

Courtesy: John Wilder

John Wilder, 59, is a marriage and relationships coach and author in New Castle, Ind.

John Wilder

Went cash-only: 3 years ago

My challenge: Reserving travel accommodations

I decided to free myself from credit cards because the companies were so aggressive with late fees, and those really downgraded my credit rating. I had become a slave to the credit card master. Three years ago I decided enough was enough and quit using my card and stopped making payments on $12,000 in credit card debt.

I still owe the money, but the credit card companies usually write off balances after seven years. It’s killed my credit rating, but it was dead anyway because of my late payments.

When I tapped out my credit card, I realized I still needed one. We are forced in today’s society to have a credit card. For example, most hotels don’t allow you to check-in using cash, and car rental companies require large deposits.

My solution: I use a prepaid credit card, Wal-Mart’s MoneyCard, which shows up as a normal credit card when I make a transaction, but it’s front-loaded. It doesn’t let you charge more than you have on the card; once you’re out of funds, your purchases will be declined. There’s monthly maintenance fee attached that’s less than $5.

I’ve been using it for about three years, and life is much easier. I wonder why I never did it before. I will never return to a traditional credit card.

Courtesy: Alex Cohen

Alex Cohen, 28, is a marketing manager in Philadelphia.

Alex Cohen

Debt free: 3 years

My challenge: Saving for big-ticket items

After graduating from college in 2003, I moved into an apartment in Philadelphia with a roommate and got a job. But I was young and didn’t know how to manage cash flow. I racked up thousands of dollars in past due bills and credit card debt.

It became really stressful and was a wake up call to either figure things out or make more money. My parents helped clear my debt, and the last thing I charged on my credit card was a new laptop. But I put myself on a payment plan right away. I projected the day I would become debt free: it was 18 months away.

But now it’s been three years and since that day, I haven’t used a credit card at all. It was hard at first, and I have had to make a paradigm shift to really figure out how to anticipate and prepare for expenses before I have them.

My solution: I’m a goal-oriented person, so what works for me is to open up different savings accounts for every purchase goal I have. It’s a concept I read about called incremental savings.

I have several ING Direct savings accounts (they don’t require a minimum balance) that I use to save for various things: emergencies, a house, car repairs, vacation, electronics (I really like gadgets) and furniture. I have a certain amount automatically withdrawn from every paycheck to start saving toward each goal.

It’s basically a credit card in reverse. Instead of having what I want now and owing the cost plus interest, I delay gratification for peace of mind. When I own it, I own it.

Courtesy: Dawn Tulman

Dawn Tulman, 39, is a small business owner who lives with her husband, Rob, and children, Zachary, Alexis, and Nicholas, in West Hills, Calif.

Dawn Tulman

Debt free: 4 years

My challenge: Running a business

My husband and I used to fund all of our living expenses on credit cards when we were starting a software company with my husband’s family. The business was doing well, but it would take at least five years for it to turn to profit. We realized it wasn’t moving quickly enough for us. If you’re buying groceries with your credit card, something’s wrong.

We were in between $15,000 and $20,000 of debt and had to settle out most of our accounts. But now I haven’t had a personal credit card in over a decade, and we’ve been debt free for about four years.

We forego a lot of things like vacations, Starbucks coffee and eating out. When we have large expenses, like replacing a failed transmission, we opt to use our savings. Otherwise, we would be paying more in credit card interest than we earn on our savings account.

But I own two small businesses and running those without debt is more challenging.

My solution: My husband and I run a computer services company, and since the business is more service-based, there often isn’t a need to use credit. We have customers pay us the same day as the service, which helps us generate enough cash flow.

But once we had to install $10,000 worth of computers for a real estate company. My debit card has a daily limit of $5,000, so we made a deal with the customer to purchase the computers.

I also have a product-based company that I couldn’t have launched without credit. I had to make an initial investment in 2007 to make the product before the first shipment was made at the end of 2008.

The product is a jewelry box with a hidden lock mechanism, so I’m meeting with a mainstream gift seller soon to have it sold in stores, and I expect that will bring in cash flow to help pay down the business debt. I’ll still keep a credit card for the company because it’s easier to keep track of expenses, but I won’t let us get crippled with debt we can’t pay.

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