Lindsey Lohan’s Credit Card Woes Reminder for All

Forget about the fashion police and film critics: as Lindsey Lohan can attest, creditors are the ones that will truly strike fear into the hearts of big stars, who live and spend out loud.

Yes, it’s true. Hollywood’s poster child, who could once afford to slap down $2.5 million on Marilyn Monroe’s old apartment, is now steeped in credit card debt to the tune of, no pun intended, a breath-taking $600,000.

That rasping sound you hear is millions of Americans scratching their heads. How is it possible that a starlet, who makes millions per film and receives up to $70,000 for simply showing up to parties, could have sunk this deeply into a quagmire of credit card debt?

The answer to that question will surely occupy talk TV and radio show hosts for weeks, months and (we hope not) even years. However, amidst the pervasive theorizing around the hard-partying actress’ personal life in general and credit card habits in particular, her predicament is a valuable reminder of one fundamental truth: financial management, particularly credit card savvy, is tricky, no matter how much money you have coming in.

For people living close to the poverty line or for the debt-strapped rich, the pitfalls of credit cards are the same: the use of credit divorces the act of purchasing from the act of paying, allowing the cardholder to bask in the warm glow of a new acquisition without worrying about the bill due to arrive in the mail a few weeks down the road.

Consequently, even affluent consumers may feel comfortable making large credit card purchases that, if they forced to pay for in cash, they would think twice about. The mental process of “I can always earn the money to pay that off later” quickly comes into play. And while this logic can hold for those with a steady income, it also easily sucks even well-to-do cardholders into a cycle of earning today’s money to pay for yesterday’s purchases.

Another element that often plays into the mix is that primal instinct we all succumb to from time to other: the need to keep up with the Joneses. While Miss Lohan may be stuck in a particularly high-pressure clique, even those of us who don’t need to worry about measuring up against the Paris Hiltons and Orlando Blooms of the world often feel the need to maintain a certain lifestyle in relation to peers.

Combine high-flying spending habits with declining income, as in Ms. Lohan’s case, and it’s only a matter of time before the creditors come pounding on the door. And while it’s easy to scale up spending habits, bringing them back in line with a reduced income can be a formidable task.

For high-flyers as well as regular Joes, the steps to get out of credit card debt (and other types of debt for that matter) are the same:

Match lifestyle to income. Total up fixed monthly expenditures, including the amounts you’d like to put aside in savings or retirement accounts each month. Subtract this from total monthly income, or a conservative estimate of this. Wine and dine on whatever is left over, but, ouch, not a penny more.

Keep track of expenses. Writing down every credit card purchase may seem like an exercise in futility, but it is the only way to ensure that you don’t overspend. Plus, it helps curb impulse purchases, a habit that credit cards in particular predispose many for. Taking a sincere look into the thought process behind impulse buys can often help over-spenders see where they need to change their habits.

Consolidate, negotiate, refinance. Explore all options for reducing the interest accumulating on the credit card debt. Consider consolidating credit card debt from several cards onto one card, by making balance transfers to a lower interest card. Look into refinancing mortgages or taking out a home equity loan to pay down the credit card debt and get a better interest rate. In addition, try negotiating better rates and a repayment plan with your credit card issuers. If you show a sincere commitment to get rid of the debt, credit card companies are often surprisingly willing to work with you.

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May 15, 2010 • Tags: Credit, Credit Card • Posted in: Credit Cards

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