posted
Just thought I'd ask if anyone has gone through this before.
My wife and I spent a year and a half, unemployed or underemployed after we both were downsized from our jobs. During that time, thanks to savings and severance packages, plus a bit of work now and then, we were able to cover the bills, but found ourselves having to use our credit cards to cover things like groceries, gas and whatever bills were unpaid at the end of the month.
Before the loss of the jobs, we carried about $8K in credit card debt, not a huge amount, but one we were comfortable making the payments on. After that year and a half the debt had risen to about $30K, plus the rates on our two cards had gone from 5.99% to where they sit now: 24.99% and 26.99% (criminally high).
Please note, we've never missed a payment, but were late a handful of times on the credit cards, which did give them the right to push the rates up.
This year, with both of us working, and the bills still coming in, we've managed to trim about $8-$9,000 off of that debt by paying every extra penny we had on the cards. It hasn't left us with anything for emergencies and when those have happened, they've had to go back onto the cards.
We end up chasing our own tails, it seems. We're making progress but it is so slow, so grinding and we've trimmed everything we can out of our budget.
So now, we have to look at some way of refinancing the debt. We don't want a second mortgage on the house as we intend to sell a year from now and we want our equity to go toward the next house (which also avoids the taxes that would be charged to us). Our credit rating has plummeted (just carrying a lot of debt, even if you are paying on it, sinks your credit score each month).
Should we seek a debt consolidation loan from a bank or actually seek out a debt counseling service? Or should we just keep lumping it, paying those bills and watching so much of it going to pay nothing but interest?
I know we've fallen into one of the most common pitfalls of modern America, credit card slavery, and both of us saw it coming, we just didn't have much choice.
Any suggestions or advice?
Posts: 2848 | Registered: Feb 2003
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posted
Are you sure you don't want a second mortgage? The rates are still fairly compelling, and I think it's better to burn off your equity if your income is too high to qualify for free consolidation.
Posts: 37449 | Registered: May 1999
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posted
The problem with debt consolidation services is that even the ones that are legally non-profits sometimes aren't, and manage to really rip you off right when you don't need it. None of them are going to be doing something for you for nothing, so if you can avoid it you should.
First, keep paying on the debt, but reduce your payments enough to build up a cash reserve equal to a few month's bills, so if you have an emergency you don't start adding to your debt again. Use the cash.
Next, call your credit cards and see if you can negotiate a lower rate. Buck up and ask, it can't hurt and it might help. Especially if you haven't been late for a period of time now... if you can say "I know we can't go back to 5.xx%, but I've made my payments on time for the last X months, how about 15%?" Every little bit helps.
Now, take your credit cards out of your wallet. Lock them up somewhere, don't carry them. If you truely want to get out of debt, there is no reason to use a credit card. If you want the ease for buying groceries and gas, use a debit card, but you'll spend a lot less if you carry cash and have to watch those greenbacks slip through your fingers every time you make a purchase.
Once you have your cash reserve, start throwing everything you can at the debt. There are two schools of thought at how you should do this... the most effective way, of course, is to pay down the highest interest debt first. However, if you have one card that has a lot lower balance, emotionally it makes sense to pay the minimum on the higher balance card and put all the extra towards the lower balance card. That way you get the satisfaction of paying it off, and seeing one of those debts actually gone. Keep doing this, moving through all your cards. Of course, the biggest one will be last, but at that point you'll know it's also the only one.
Note: I am not a professional credit counselor. I have, however, spent most of my career in collections, dealing with people who need to make this kind of decisions. Debt consolidation loans are great if you get rid of the credit cards, because of the lower interest rate. But most people, once the cards are clear, keep using them, and slowly built it back up and then have the loan and the revolving credit. And that's a pit that's even harder to get out of.
Edit: I firmly disagree with Tom. I think it's a bad idea to use equity in your home to pay off your credit card debt. If your home is more heavily leveraged and you lose your jobs again, you really want to lose your house because you took out a second mortgage?
Oh, and also, unless you have a really great reason for needing to buy a new house, why not let that wait another year of two until you get rid of the other debt? Yes, interest rates might be higher, but you'll also qualify for a better rate because of your improved credit report. And if you move, your house payments will probably go up, and it will take you even longer to get rid of that nasty interest.
posted
You might look into some of those transfer a balance for a low interest deals on credit cards. Those can get you excellent rates with one reserve: you must never, ever use the credit card. This is because things bought with the credit card are bought at a much higher interest rate, yet payments on the card are applied to the transferred balance first.
Posts: 15770 | Registered: Dec 2001
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posted
I would advise against the debt counseling service -- just because you can mostly get this type of advice free from your local bank if you are a regular customer, or from government offices that focus on credit.
Also, found out from a co-worker that used a debt counseling service -- it then shows up on your credit report that you are being helped or advised through a debt counseling service -- which I guess gives the impression to those checking your credit that you can't do it on your own. At least it showed up on his credit report that his "debt" was being managed by a counseling service.
posted
I used to work for American Express and I do know that by joining a credit counseling service you immediately wreck your credit rating and will be shunned by credit card companies for a minimum of seven years (for breaking the cardholder agreement that the debt is between the cardholder and the issuing company).
Believe me, I want nothing more than to cut up the credit cards and work our way out of this debt. I went for years without credit cards by choice, but managed to inherit these two when my wife and I married.
Don't get me wrong, they were definitely there when we needed them, and I realize that you do eventually have to pay the piper, but sometimes that debt does feel both crushing and never-ending.
I know that if we keep going as we have with the payments, we should clear them out in about two more years (and have finised our car payments about a year ahead of that) and things will be much, much easier then. (Barring another set of layoffs or whatever that one can't predict). But we do have a baby coming along this February.
And I do fear that right now, we're just making enough rope to hang ourselves financially with again at that time.
Thank you folks for such excellent advice so far, I truly and deeply appreciate it. Tom, while the second mortgage is attractive at the current rates, I just hate putting that equity in limbo. Right now, we have enough clear equity to have just over $30K as a downpayment on the next house. And that is something we're very reluctant to give up in light of a planned move next year.
Eljay, thank you for breaking it down in the way you did. The psychological boost of paying down the smaller card (the split is about $10k, $20K with the higher interest on the smaller amount), might make a big difference. And only writing one check a month will be a nice boost as well.
I'd love to do a balance transfer, but with the plummeting credit rating, I'm afraid we wouldn't qualify for a new card. Also, those balance transfer rates only last for six months usually, and then can jump very quick. While we could just do it again, we could find ourselves painted in a corner, too.
It's pretty darn daunting every day. And somedays, it just gets downright disheartening. Crushing at times, it just creates those days when you've got nothing but despair.
Of course, we dig our holes one shovelful at a time. It also means that we have to fill them back in the same way, one shovelfull after another.
(Sopwith adjust his goggles and rolls up his sleeves) Where'd I put my shovel?
Posts: 2848 | Registered: Feb 2003
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posted
It doesn't cost anything to get a consultation with Consumer Credit Counseling, nor are you then obligated into joining their program. I had a consultation with them last year, and it was very informative, I thought. As a single person, it was helpful to sit down with someone and go over everything. It might not be as helpful since you're married and have someone to bounce this kind of stuff off of, but it is worth a try anyway.
Posts: 72 | Registered: Aug 2002
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posted
Call customer service for each of your cards, and insist on speaking with a supervisor. Explain your situation. Many will lower your interest rate.
And it can't hurt to ask, right?
Good luck! Getting out of debt takes a while, but it feels incredible when you are out from under it.
Posts: 32919 | Registered: Mar 2003
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posted
Well, we did use a credit counseling service. After we had some business trouble (or rather employee trouble when one stole quite a large amount of money from us, and didn't pay our suppliers for months) we were in dire straits.
The debt that had piled up at the suppliers had to be paid, because we couldn't keep working if not so we exhausted all personal savings and ran up credit cards to survive. When business got back on track, the interest was burying us.
We contacted a Christian counselling service, they negotiated new lower rates for us (after we had already tried to negotiate them ourselves, and were told no) and got our payments way down.
Since then we have been able to put a lot of money into the debt so instead of the projected five years to pay it off we should be done in one. We have no credit cards and I never intend to have one again. We have savings for emergencies, we were able to build those back up again. Our cars are both paid for, we have had to do some repair work on the van, but it runs perfectly and I intend to keep driving it for another year or so. With the way we've been saving, we may well be able to buy our next new vehicle outright.
It took a lot of work, and it was hard because while we were fighting the financial trouble we were also fighting the emotional trauma since the employee was my stepfather. Now, we also have my mother living with us.
It's a tough thing to recover from debt trouble, but once you're out from under it, it feels so wonderful!
Edit: EEEK! I just saw this was 7999. No one expects a landmark from me do they?
[ August 27, 2004, 12:18 PM: Message edited by: Belle ]
Posts: 14428 | Registered: Aug 2001
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posted
Sopwith, my first thought was to get the second mortgage. I understand your concern, though. So, I'll modify what I was originally thinking. Look at your bills and see how much you are paying a month in interest between the two credit cards. Then find out how much your payments (principal and interest) would be with a consolidation loan. You might find that the difference is huge and you could be paying down the debt much faster with the second mortgage. In a year, you might have been able to recoup a lot of what you lost.
For example, let's say the one with $20,000 is the one that has the interest rate of 24.99%. At 600 a month, it would take you 58 months to payoff. A second mortgage, even at 21% the monthly payment, to pay it off in 60 months would be $444. Now, actually paid $600 a month on the second mortgage, it would only take you 40 months to payoff the debt. And, at 234.99%, over 58 months, you would end up paying nearly $35,000. Even at 21% you'd end up only paying only about $25,000 with the second mortgage.
But like I said, I understand not wanting to do it. It just might make more sense financially to do it that way and maybe wait an extra year or two to move. Either way, you really should look into how much you are paying in interest now and how much it would be with a second mortgage, or consolidation loan.
Posts: 9871 | Registered: Aug 2001
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posted
This is probably an impossibility, but do you have any close friends or family that would be willing to loan you 1k or 5k interest-free that you could use to pay off part of the cards? That loan would save you a lot in the long run. But some people don't like the idea of loaning or borrowing from people they know.
(I loaned a friend about $1k in college so he could buy a computer. He paid me back in $100 or $200 increments over a few years.)
Posts: 1261 | Registered: Apr 2004
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quote:Should we seek a debt consolidation loan from a bank or actually seek out a debt counseling service?
If debt counsellors contact your credit card companies to negotiate for you, this will be a big ding on your credit rating. You need to get your rates lower somehow (as I'm sure you know). Calling your companies seems like the best bet.
You may be more able to get another card than you think. Look into some of those introductory rates, and be prepared to move when the rates expire if you must.
You need to think about the equity loan, even though your concerns are valid. If you get a longer-term loan, you can pay more than the required payment each month but know you can reduce if an emergency happens.
posted
Hmm Dagonee brought out a in interesting point. If you consolidate and switch to a no-interest card for the first 6 months, how high would the interest rate jump after that? I bet you could find one that wouldn't jump any higher than the current interest rates you have now, and it would give you six months to put what you are now paying in interest towards the balances instead.
posted
No interest will almost definitely not apply to balance transfers - they are treated as cash advances, so you need to do the research on both the upfront and ongoing rates. Usually this will still be better on a transfer, and certainly better than 26%. But every dollar in finance charge is a dollar not going to reduce the balance.
posted
Avoid credit counseling services at all costs. They will only push your credit score lower. Explore your options with your bank. They may be able to help you. Leave a 2d mortgage as your last choice. ElJay has some excellent suggestions. We're in this boat too and I really appreciate his suggestions.
Posts: 1132 | Registered: A Long Time Ago!
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posted
(I'm a her, but I'm glad you found my response helpful.)
Dag, I get offers for 0% for 12 months on balance transfers all the time. The way they hook you then is if you use the card for anything else, your payments go to the stuff sitting at 0% first.
Posts: 7954 | Registered: Mar 2004
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posted
I have a friend who works for Cambridge Credit Counseling, and he has said (off the record, of course... ) that unless you have already ruined your credit an agency is not the way to go. If you find yourselves in dire straights it isn't a bad idea, but in the situation you described I don't think it would be a good idea at all.
First of all, never agree to "settle" and account for less than full value....it doesn't help your credit despite what some companies will tell you. It is a breach of contract, and can single-handedly ruin your credit.
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I just saw this was 7999. No one expects a landmark from me do they?![[Big Grin]](biggrin.gif)
) that unless you have already ruined your credit an agency is not the way to go. If you find yourselves in dire straights it isn't a bad idea, but in the situation you described I don't think it would be a good idea at all.
