Drowning in Debt

Q: I am embarrassed to admit this, but we have over $43,000 in credit card debt. Early in our military career, we had only one or two credit cards with low balances, and then an offer would come in the mail for a great lower rate with a higher limit. Of course, this was an excellent way to save money (yeah, right!) and the offer was accepted.

Now, most are maxed out and I am still able to pay a small amount over the minimum, but I have about 13 different accounts – most are at 20% interest. I often get stressed about whether I remembered to pay them all or whether I mailed them on time in order to avoid late fees and increased interest rates.

It has gotten to the point where I call everything in and pay astronomical processing fees. Even then, I call repeatedly just to confirm they were processed correctly and on time. It is truly keeping me up at night. We used to have a great credit score of over 800, but now it is in the upper 500s to low 600s, because of the debt-to-income ratio. I would love to consolidate and can afford a large payment, but I think the score is too low.

We have the rental on a first mortgage and have never taken equity, which is now about $35,000. Would it be better to sell this property (we will never move back in to it and it is costing us about $200 out of pocket each month), take out an equity line or do nothing and continue to make small payments over the minimum on the credit cards? We are going to retire in three years and have no savings built up and can't seem to put any extra away due to the interest rates on the accounts.

-Tina, AEP

A: When your finances cost you sleep, it’s definitely time to make some changes. You have a serious situation here. I’m going to give you a list of “do’s and don’ts” but want to preface that with: DEFINITELY avoid taking out a home equity loan or line of credit at this time. Based on your personal history, the results could be tragic.

 
Do:

1. Stop charging now! Piling on more debt will make matters worse. Lock away the cards. That’s right – don’t even carry them with you. You must remove the temptation completely.

2. Face the music. Open all of your bills. With highlighter in hand, mark your balance, interest rate and minimum payment.

3. Develop your plan of attack. Decide if you want to tackle the highest interest rate card first (saving you the most in interest) while paying the minimum due on the other cards or pay off the smallest balance first (to feel a sense of achievement). Both works, but you must decide what will work best for you. Lay out a plan of attack calculating how long it will take to pay off the first card, then the second and on down the line. Consider using the Debt Analyzer Tool on usaa.com.

4. Set up online bill pay. The more convenient it is to pay your bills, the more likely you will be to pay on time. This will save those “astronomical processing fees” and allow for “on time every time” bill paying! Over time this will help to improve your credit score.

5. Ask for lower interest rates. Every dollar that you save on interest will pay down the debt. It’s a good thing.

6. Consider selling your rental. I hesitate to mention this because the rental could be your best bet for a “forced savings plan.” But selling it could be your ticket to a better financial footing. Depending upon what it would cost you (i.e. realtor and other closing costs), selling your rental could net $25,000 to $30,000 all of which could be plowed into your credit card debt. Wouldn’t it feel good to owe only $15,000 in credit card debt?! Far more manageable to be sure. But – and this is critical – you would need to make sure you never charge those cards up again.

7. Develop a spending plan. No, this is not a fun exercise, but it’s absolutely essential to your success in digging yourself out of this bind. Track every dollar you and your family spends for two months – literally every dollar. Find areas where you can cut back (cable TV, dinner parties, dining out and a host of other nice-to-haves) and apply that found money to the debt. Determine a reasonable amount of “fun money” to set aside each paycheck for yourself and your husband. You can do whatever you please with those monies, but neither of you can go back for more if you run out! This will help develop better spending habits.

8. Tune into my webinar on usaa.com titled Wiping Out Debt – Your 2008 Action Plan. In the one hour it takes to view, you can learn the importance of taking charge and eliminating debt as well as ways to do it.

 Don’t:

 

1. Take out a home equity loan or line of credit on your rental. (This bears repeating)! Again, considering your track record, this could be a huge mistake.

2. Accept new credit cards. Opening additional credit card accounts can further damage your credit score and allow for digging yourself deeper in debt.

3. Fully retire in three years. It’s a stretch. My hunch is that you may not have much in the way of savings as you’ve been battling debt for years. Once your husband retires from the military, try to live off the income from his new career. Then use the retirement pay to finish off debt, build an emergency reserve fund (to avoid future credit card debt) and stash cash in savings and investments.

 

The final issue is rebuilding your credit. Your score has plunged for a few different reasons. First, you’ve made late payments repeatedly. Second, you’ve maxed out your cards. Keeping your balances low relative to the max allowable balance is critical as it accounts for 30 percent of your credit score. Make your future payments on time each and every month and work to get those balances first down to 50 percent of the max, then move toward 35 percent. Order your free credit report from www.annualcreditreport.com to eliminate any errors and keep track of your progress.

This may seem like a huge mountain to climb, but if you focus on one (sometimes grueling) step at a time, you’ll make it to the top.

 

Comments

[Janet Braccio]

Too much credit card debt? There’s help for active military personnel and their families.

If you and your family are in severe debt, Bills.com’s Operation Debt Storm can help get your personal finances in order.

Depending on the amount of debt to be resolved, there’s a 10 percent discount offered through the program that can save you thousands of dollars.

I’d check this out right away and get the help you deserve. Interested members of the military can contact Bills.com by visiting (https://www.bills.com/debt-storm/) or calling 800-544-7211 (mention “Operation Debt Storm”).

Janet Braccio
Boulder, Colorado
For Bills.com

[Debt Blogger]

I would try to avoid selling the rental too. If you can get by without doing that then when you retire in 3 years it will be a great extra source of income & will also provide you with a nice security blanket.

There's some great advice here & even if you have to take a little debt into your retirement, i'm sure it is possible without selling your rental!

Good luck!

[credit score]

Nice one. Mortgage may helpful to purchase investments property. Thanks a lot.