DAVE RAMSEY: Big Apple taking big bite from little paycheck

Dear Dave: I'm having a problem with some of my credit card debt. I'm single and earn about $35,000 a year. I have several credit cards and I've never missed a payment. However, I moved here to New York City a few years ago and the cost of living is higher even though I have a roommate. The credit card companies keep increasing my credit limit and I keep using it up. The payments are getting higher and higher. I can still make them, but I can foresee a time when I won't be able to make those payments any longer. A friend of mine suggested filing for bankruptcy, but another friend recommended asking your advice. What do you suggest?

- Heather in New York

Dear Heather: Wow! Living on $35,000 in New York City has got to be tough! Bankruptcy will remove the debt, but debt is not your problem. Your problem is that you're spending more than you make. Bankruptcy won't make your problem go away. I know you're probably not going to Europe or living extravagantly. You may be, but I think you've already identified that you've just got a low income for someone living in New York City.

Something has to change in your situation. Even if you file bankruptcy, you'd be right back in trouble in a few months because it's costing you more to live there than you earn and you're financing that with your credit cards. You've got two or three issues going on here. Debt is just the symptom and I don't want to you to only treat the symptom. Let's dig all the way down to the bone and get the infection.

First, you need to decide if you can even afford to continue living in New York City – even without the credit card debt. You've got to sit down and make up a budget, which is just a written plan of where and how you will spend all of your money. Then you've got to take a good hard look at that budget and decide if you can continue living there.

If you decide that you can, then you need to cut your lifestyle down to bare bones necessities. In addition you need to increase your income. You need to sell stuff to get money to pay off this debt. You may be packing your lunch for the next two to three years to save money. You may not eat out again at all for three years just to pay this off, but, believe me, that's better than bankruptcy. You can also sacrifice your evenings and get some extra work to create more income. Take all of that extra income and put it on the credit card debt.

Think about this, if you could earn enough income to pay $1,500 – 2,000 a month on these credit cards, you could be out of debt in two or three years.

I'm not prescribing a pleasant plan. This is not going to be fun. But if you get free of this, you'll never use another credit card for the rest of your life. You've also got to cut up those cards. You're using them as a rubber crutch and they are letting you down. Every time you have a little bit of money trouble you're running to those cards. I know, I used to live like that and life's no fun there. That lifestyle brings stress, shame, guilt and it's got a lousy future built into it. Make the sacrifices, get rid of the credit cards and make the tough decision about continuing to live there. In either case, stay or go, Heather, I don't think you're bankrupt. I know you're alone there and scared, but you can work your way out of this mess. If you need further help working through this in the future, write me back.

- Dave

Fraud alert on credit reports

Dear Dave: My husband's ex-wife has used his social security number to establish credit card accounts. Now, years later, she has filed bankruptcy on them. We are disputing the charges and writing the credit card companies. Is there anything else we should be doing in this situation?

- Kim in Jackson, Tenn.

Dear Kim: Yes. You need to put a fraud victim alert on your credit bureau reports. You also need to file a police report and, if possible, have her arrested. She has committed criminal fraud. You should also be dealing with the fraud victim division at the credit card companies. This isn't a dispute. It's a denial of responsibility. Tell them you will not be paying this bill. Let them know this is not your bill; this was act of a criminal. Also, make sure you stand your ground with the credit card company. They will try to make you feel like you need to pay this anyway – and you don't!

- Dave