Advice – Paying off Credit Cards

[Anonymous]

Putting the balances on a 0% card makes alot sense so long as they rip it up once it resets. I’ll definately look into doing that. As far as using the 401k, I have heard alot of people here say that they are adverse to touching it, but I still don’t see the difference between using that to pay it off and just using income. For example, if my parents income suddenly went up by $25,000 just for one month, and they used it to pay off the cards, that is no different than using the 401k at this point. Am I missing something?

[Doofrat]

On possible problem with getting them down to two cards is that the credit card companies will just up their limit to compensate. I went to only one card (my wife has another) and within two years, they upped my limit to $30,000 and send me those blank credit checks every two weeks.
If your parents don’t have the willpower to not spend on credit, then a fresh start will only be a fresh round of credit and they will be down $25,000 in their 401k.
I’ve seen this happen with friends whose parents bailed them out of credit card debt. In no time, they were back in big debt.
I’m not saying your parents are like that, but you should consider whether they are or not.
Perhaps they should talk to a financial planner, the administrator of this site is a financial planner and can be reached at [email protected].
I referred somebody to him and was very very impressed with the results!

[ibjames]

A lot of this is how much your parents are willing to work at it, or how much you are willing to be the hawk making sure they aren’t slipping

[sdduuuude]

Important questions:
1) What kind of interest rate is the 401k earning? 5% ?
2) What would they do with the extra “income” once they pay off the house? Is that money earning any interest? Probably not.

By touching the 401k, you take money that is working and earning interest and getting rid of it. It isn’t a bad decision cuz you are taking money that is earning at, say 5% and paying off a loan costing 15%.

But, you’d do better taking money that is earning 0% and paying off the 15% loan, letting the 401k grow while they pay off the debt with money that isn’t earning interest anyway.

By using their “normal” income, they would have less cash to spend on crap they don’t need. It’s a harder pill to swallow, but you are giving up less because you are not diminishing their capital that is earning interest.

I’d make them do it the hard way.

Also, the difference in interest between a HELOC and a credit card is pretty significant – several percentage points, I’d guess. And, the effective after-tax interest rate of the HELOC is 15% below that if they can write off the interest.

NOTE: One factor in deciding your credit score is your credit limit – to – balance ratio. That is, your credit score would be higher if you have credit cards with a $10,000 limit and a $5,000 balance than if you have a $5,000 limit and a $5,000 balance.

Closing credit cards with no annual fee and zero balance isn’t always a great idea – it can actually hurt your credit rating.

[SD Realtor]

Juice – I think there have been alot of good ideas about the way to payoff the cards or consolidate the debt. What is more worrisome is how will you help them break this habit. I would advise that before you come up with the solution, of which there are many, the harder task is identifying the root cause of the problem.

First thing first is to identify how they have come to accumulate so much debt. Has the accumulation occurred over time due to excessive buying or has it simply been the cost of daily life? If you do not figure that out then it doesn’t matter what you do, they will be in hot water again over time. Then come up with the recovery gameplan. Honestly I agree with duuuuude about a HELOC or even a refi with cash out may be the better deal. I think the quickfix solution of the 401k is not psychologically healthy. I think the fix (a higher mtg payment or a HELOC) acts as little bit of a reminder of what will happen if they do it again. Also losing a good portion of your 401k can be stressful.

Whatever solution you provide, identify the root cause AND definitely make sure they implement a strict new regimen immediately. Otherwise all your work will have gone to waste.

[Anonymous]

You can refinance your credit cards in with your mortgage loan. It could have big savings every month for you. If you go to http://www.mortgageawareness.com they have a free worksheet to fill out to see how much money you can save a month. I hope this helps.

[ltokuda]

Juice, at this point I think it would be risky for your parents to tap into their 401k. It seems like you’re trying to fix their debt immediately, then are hoping that they’ll change their lifestyle afterwards. The problem is that if they don’t fix their lifestyle, they’ll be even worse off.

So maybe they should change their lifestlye first. Once they train themselves to live within a reasonable budget, it will be safer for them to use their 401k.

When I first moved to California (and wasn’t making too much money), the key for me was having a budget plan. It was pretty simple plan (rent+utilities+household items, car+gas, food, presents, and vacations+entertainment). The rent and car related paymets were basically fixed every month. So the only thing I had to concentrate on was limiting my food, presents, and entertainment. It wasn’t hard to do because I always knew what I could and couldn’t afford. Following this budget allowed me to pay off my credit cards every month.

I would suggest that you work with your parents to come up with a budget plan and see if they can stick to it. If so, then they’ll have plenty of options for reducing their debt.

[BikeRider]

These people are a paycheck away from disaster. I’ll tell you what I did two years ago and it has been the best thing for me. I cut up my credit cards and just use my debit card. I do not have a big payment starring me in the face at the end of each month (I used to pay off the cards each month). Credit cards are a trap. As one poster (at least) said, if they miss a payment on ANYTHING (phone bill, house payment, electric bill, credit card), the card issuer uses that as an excuse to bump the interest rate up to the upper limit, which is typically 30%. I listen to a money show where people call in with their troubles. Almost all of them have very high credit card debt, extremely high interest rates (due to missing some other payment) and it is killing them.

I wouldn’t recommend them taking out a loan to pay off their credit card LOANS (people forget they laoned themselves money!). They won’t be changing their habits. Too many people get a HELOC, pay off the cards, then run them back up. Then they have credit card debt AND the HELOC, with no access to more money (unless the house still has room for more HELOC….can you say crazy?). They need to buckle down, cut up the cards, then start paying off the debt. Do as Dave Ramsey says, start with the smallest amount, then work up. As they pay off the smaller loans, then they have more to apply to the bigger ones. Just pay minimums on all the rest as you attack the smaller amounts, working up.

My wife and I have no credit card debt at all and it is WONDERFUL, believe me.

[Raybyrnes]

I take a completely different approach. I have always been very responsible with my credit and this has provided me with0% credit card 5% car loans etc and I loan up on debt as long as the banks and lending institution are willing to dole it out. I have used the proceeds of their money and stuck it into a MMA accout that pays better than 5%. On 20K of debt I earn over a 1000 a year by being the bank. While I can appreciate that some miught feel having no debt is comforting to me it is costly when I can put my moeny to work while at the same time increasing my liquidity.

With respect to paying off smaller bills first I might suggest you would be better off to simply line up your debts from highest interest rate to lowest interest rate and make maximum payment on the highest debts and work you way down hill. This would be a far better alternative to paying doiwn debt.

[North County Native]

I’m sort of in a similar situation right now. I tried to keep the budget as a stay at home mom but it became impossible the last few years of my husband going to college. We took out student loans but it was too little, too late. Here’s what it looked liked last week – $18,000 on credit cards, $15,000 in student loans. Our student loan payment is fine – $125 a month. I only wish that we had taken out another $15,000 in student loans. It would’ve saved a lot of grief.

I went online to http://www.oprah.com to see what kind of worksheets Oprah had on reducing debt. Search for “debt diet” and you will find these worksheets. I’ve also read a couple of books about how to get out of debt. I checked them out of the library so I can’t remember what the titles were.

After using the worksheets and discussing things with my husband, we applied for a 0% card for the next year. We each got one and he is actually going to call today to see if his credit line can be raised since they only gave him $2500 and gave me $4500. We transferred half of a balance of one of the major cards to my card. We paid off the remainder of the balance of that major card with our tax return. Next he is going to balance transfer whatever amount he can to his 0% card (again, depending on what they can offer as far as a credit increase).

I had recieved one of those notices that my interest on my card with $6700 was going to skyrocket soon from 13% to 30% if I didn’t opt out of the changes. I called and asked how I could opt out. We aren’t using any of the cards anymore so when they told me all I had to do was close the account to freeze the interest rate – I said “Sure!” So now that account if closed and I just have to keep making payments on it until its paid off. We are hoping to transfer this one to his 0% card. We also have a couple of department store cards that were up to $1000 each. My husband recieved a pay increase that was issued in a single check and retroactive for a few months. Instead of spending that money on something we want we paid off half of one of the department store cards.
Now we are down to $13,500 in credit card debt. We won’t be paying interest on at least $6500 for the next year.

I wanted to help more with things so when my brother-in-law had a childcare crisis, I decided to step in and help. I didn’t really want to but seeing that we are having our 3rd child soon, I wanted to be able to make a bigger dent in the department store cards – especially since those were the cards that I didn’t have to use and caused the biggest contention in our family because they were items not needed as much. So now I’m paying off that card with the income from watching my nephew. By the time the baby is born, these cards will be paid off and the leftover money is going to buy a new carseat and stroller and whatever else we may need (I know that I don’t need a ton of junk – it is our 3rd kid and I will not get caught up in marketing!). So we will be down to $12,000 in debt in a few months.

I think some counseling and soul searching for your relatives would be good. What I finally realized is that our debt was so crushing that it was the root of all of our arguments! The minimum payments that would pay down only a few dollars a month on the highest cards were totally ridiculous! We want something better for our family and what I’ve learned is that you can’t buy before you have the money. I also don’t really want to watch my nephew because its time that I should be spending with my son while my daughter is at school. Pretty soon he’ll be having to share my time with a baby too and I deeply regret that I have to share my time with him and my nephew right now. That alone is enough for me to want to watch what we spend from now on.
You’ve got to tap into what is important to them! Do they really want to work for years and years when they could be retirees having some fun?

So My husband and I have this plan and we are sticking to it! We will have 3 kids in the backseat of the car until the baby is at least a year old. In 16 months I will have all of the credit cards and the car paid off! All that will be left is the student loan which is just fine. I even think that I don’t want to rush back into having a car payment again so I might not get that minivan until a few years from now. Its a luxury – not a necessity (until I have 4 kids – LOL!)

I hope this can help you. It is possible to pay off debt. My husband and I are doing that on his entry level (he graduated in May) professional salary while I stay home – with almost 3 children! He will also be heading back to school for his M.S. in the fall. Luckily he gets free tuition since he works for the university!

Good luck to your family! They can do it!

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