Paying off credit card debate

[ccgirl]

So...I am in a debate with a friend of mine regarding their credit cards.

A bit of background...they have $20,000 in credit card debt at an average of 17% interest. Are never late and can make their minimum payments. They also have a $15,000 student loan at 8% interest.

They currently hold a mortgage of $255,000 on a home appraised at $340,000 so they do have equity there.

They also currently have approx $60,000 in retirement thru work.

They would like to either get a home equity loan at 5% to pay off the revolving debt in 5 years or take out a loan against their 401K's. The monthly payment due on the home equity would still be less than the minimum on the cc's and student loan but their equity would be tied for 5 years.

My vote was for the snowball method but apparently that is not an option to them.

Which would be best?

BTW...she knew I was posting this info just asked me not to use names. She is very interested in any input.

Thanks!

 

[Tink-aholic]

If you know the snowball method, then you're familiar with DR. He says (and I agree) that it is a bad idea to replace unsecured debt with a secured one. The current financial situation is enough to show your friend that anything can happen, even if they think they are secure in their jobs.

What happens if they hit a financial crisis? Instead of just not being able to pay credit cards, they lose their home. Bad, bad idea.

Just my $0.02.

 

[TomAndLori]

If you know the snowball method, then you're familiar with DR. He says (and I agree) that it is a bad idea to replace unsecured debt with a secured one. The current financial situation is enough to show your friend that anything can happen, even if they think they are secure in their jobs.

What happens if they hit a financial crisis? Instead of just not being able to pay credit cards, they lose their home. Bad, bad idea.

Just my $0.02.

This.

Also, borrowing against a 401K will make one financial crisis (losing your job) into a worse one. You are required to pay back those loans immediately when you leave the company.

 

[jstack]

I too have heard that you are not to replace unsecured debt with secured debt. Best method would be to pay off small amount first and build on from there. Good luck.

 

[Gr8t Fan]

I don't like either option, but if I had to choose, I'd choose the home equity option with the understanding that all credit cards (except one) would be cut up and never used again. The remaining credit card would be frozen in a block of ice and (hopefully) never used again. Then use the snowball method on the home equity loan -- the amount she paid towards credit cards and student loans -- to be paid on the equity loan, regardless of what the minimum on the loan is.

 

[PrincessDreams2]

Sell the house.

They are obviously in over their heads if they have racked up $20,000 in credit card debt while having a $255,000 mortgage, and have only saved $60,000 for retirement between the two of them?

Sell the house, pay off all the debts, establish an emergency fund, get a smaller home, and change their spending habits. But this is a very drastic option, but one that could actually save their financial futures. Otherwise, I would follow Dave Ramsey's plan and not take a loan or borrow against anything.

 

[mom2faith]

Sell the house.

They are obviously in over their heads if they have racked up $20,000 in credit card debt while having a $255,000 mortgage, and have only saved $60,000 for retirement between the two of them?

Sell the house, pay off all the debts, establish an emergency fund, get a smaller home, and change their spending habits. But this is a very drastic option, but one that could actually save their financial futures. Otherwise, I would follow Dave Ramsey's plan and not take a loan or borrow against anything.

WHAT!!! That is a crazy option!!

Having a $255,000 mortgage is not "in over their heads", and $20,000 in debt is not great, but for crying out loud, it is not that bad either! That is a very narrow minded response! Not everyone with credit card debt is "in over their head". You do not have enough information about the OP friend to make that judgement. They could be young first time home-owners in a high market where $255,000 is peanuts. You also have no idea how much they make.

Sorry for ranting, but that was a judgement.

OP. Snowball it! Convince them it is the best way!!

I would download one of the snowball spreadsheets online and show them the numbers and how quickly they can pay it off.

 

[csharpwv]

Have they used a debt calculator online to see how long it will take them to pay off their credit cards by just paying the minimum and how much MORE they will have had to pay over that time by not doing something drastic about their credit card debt. The interest doesn't rest.

In my opinion - step one is to call the credit card companies to try to negotiate a lower interest rate on their credit cards.

Step Two - FOOD BUDGET:BUDGET FOOD - so many American eat out for breakfast, lunch, and dinner. My wife and I have stopped eating out - getting take out - etc - our budget was OK - but we knew it was a waste and not healthy - so we pledged to cook at home every night. We have eaten at home every week night - and one night on the weekend for almost three weeks now. We are saving so much money - and eating better - and having fun cooking at home!

Step three is to cut their 'living budget' way back - eliminate cable (or at minumum reduce their package), and home phone service is they have it. If there are any other optional utilities that they have - reduce or cut those altogether. We canceled netflix - and hot HBO instead - and in the process saved $600+ on our cable bill this year by negotiating a lower rate with the cable company. It's easy - just call your cable company - tell them you want to cancel your service - and they will negotiate (at least ours did!)

Step Four - Shop Used FIRST! If you need something (I SAY NEED not WANT) shop for it USED first. I bought a GREAT laptop last year for 1/2 price - and it wasn't even a year old. Great buy - it will serve me well for years to come!

Step Five - take on a 2nd job. Don't think first about working for someone else - think about starting your own business from home. If you have a skill that you can put to work - DO IT! If you make greeting cards - SELL greeting cards! If you play an instrument - teach others to play that instrument! If you take great photos - do it for money! If you have free time in the evening or in the evening - find someone who needs child care! For instance - you normally work out in the evenings, what if you work out in the mornings and find a mom who needs someone to watch her child while she goes to the gym or goes shopping. You have the time that they need! USE IT TO MAKE $$$ Plus - watching children can be a great way to stay healthy LOL

Step Six - How many things do we all own - that we HAD to have - but are now collecting dust? I have a few that I can think of! LIQUIDATE! If you don't need it - don't have it! If it's just collecting dust - and you know you don't need it - SELL It! Someone else may very well be looking for the item you no longer use!

Finally Step 7 - Think before you spend. Whether it is on utilities, clothing, food, housewares, cleaning products - anything that costs $$$$ - think before you spend! If you are an impulse shopper - don't take cash or a credit card with you if you need retail therapy - retail therapy works the very same way if you don't buy it. You will only buy what you have the ability to purchase - and if you don't have money or plastic - you can't buy anything. I know I go to the mall just to get out - and be around people, activity, and nice things.

If you have equity - that doesn't mean that you should use it. Equity isn't going to disappear - BUT - if it does - you don't want to be the one left holding the empty cup labeled 'Equity'.

Student loans are a pain - but if you are earning more money than you would without a degree- then you know it is a necessary evil!

Credit cards can be brutal - you can afford almost anything with a credit card! I know we are suckers for 0% finance offers. They're GREAT!

 

[TomAndLori]

WHAT!!! That is a crazy option!!

Having a $255,000 mortgage is not "in over their heads", and $20,000 in debt is not great, but for crying out loud, it is not that bad either! That is a very narrow minded response! Not everyone with credit card debt is "in over their head". You do not have enough information about the OP friend to make that judgement. They could be young first time home-owners in a high market where $255,000 is peanuts. You also have no idea how much they make.

Sorry for ranting, but that was a judgement.

OP. Snowball it! Convince them it is the best way!!

I would download one of the snowball spreadsheets online and show them the numbers and how quickly they can pay it off.

It's really not that out of line if they are only able to make minimum payments on $20,000 in CC dept. They are house poor. Selling the house (if they can get a decent price in this market), is a better option than securing the CC dept with the house. What is being talked about is downsizing to get out of dept. Not something to be taken lightly, but certainly not ridiculous.

Of course this is being said without having any idea the area of the country they live and whether they can reasonably downsize. A $350,000 home in Connecticut is not the same as one in Dayton.

 

[csharpwv]

HAHA I didn't meant to type 'hot HBO' - I meant to type GOT HBO - LOL
:Blush:

 

[ccgirl]

WHAT!!! That is a crazy option!!

Having a $255,000 mortgage is not "in over their heads", and $20,000 in debt is not great, but for crying out loud, it is not that bad either! That is a very narrow minded response! Not everyone with credit card debt is "in over their head". You do not have enough information about the OP friend to make that judgement. They could be young first time home-owners in a high market where $255,000 is peanuts. You also have no idea how much they make.

Sorry for ranting, but that was a judgement.

OP. Snowball it! Convince them it is the best way!!

I would download one of the snowball spreadsheets online and show them the numbers and how quickly they can pay it off.

You are right...they live in the NE so a $255K mortgage is not that crazy. The thing is...they have so much equity they couldn't even buy a 2BR house for that now. She would only tell me they make more than $100,000 but less than $125,000. Great idea bout downloading the spreadsheets.

Have they used a debt calculator online to see how long it will take them to pay off their credit cards by just paying the minimum and how much MORE they will have had to pay over that time by not doing something drastic about their credit card debt. The interest doesn't rest.

In my opinion - step one is to call the credit card companies to try to negotiate a lower interest rate on their credit cards.

Step Two - FOOD BUDGET:BUDGET FOOD - so many American eat out for breakfast, lunch, and dinner. My wife and I have stopped eating out - getting take out - etc - our budget was OK - but we knew it was a waste and not healthy - so we pledged to cook at home every night. We have eaten at home every week night - and one night on the weekend for almost three weeks now. We are saving so much money - and eating better - and having fun cooking at home!

Step three is to cut their 'living budget' way back - eliminate cable (or at minumum reduce their package), and home phone service is they have it. If there are any other optional utilities that they have - reduce or cut those altogether. We canceled netflix - and hot HBO instead - and in the process saved $600+ on our cable bill this year by negotiating a lower rate with the cable company. It's easy - just call your cable company - tell them you want to cancel your service - and they will negotiate (at least ours did!)

Step Four - Shop Used FIRST! If you need something (I SAY NEED not WANT) shop for it USED first. I bought a GREAT laptop last year for 1/2 price - and it wasn't even a year old. Great buy - it will serve me well for years to come!

Step Five - take on a 2nd job. Don't think first about working for someone else - think about starting your own business from home. If you have a skill that you can put to work - DO IT! If you make greeting cards - SELL greeting cards! If you play an instrument - teach others to play that instrument! If you take great photos - do it for money! If you have free time in the evening or in the evening - find someone who needs child care! For instance - you normally work out in the evenings, what if you work out in the mornings and find a mom who needs someone to watch her child while she goes to the gym or goes shopping. You have the time that they need! USE IT TO MAKE $$$ Plus - watching children can be a great way to stay healthy LOL

Step Six - How many things do we all own - that we HAD to have - but are now collecting dust? I have a few that I can think of! LIQUIDATE! If you don't need it - don't have it! If it's just collecting dust - and you know you don't need it - SELL It! Someone else may very well be looking for the item you no longer use!

Finally Step 7 - Think before you spend. Whether it is on utilities, clothing, food, housewares, cleaning products - anything that costs $$$$ - think before you spend! If you are an impulse shopper - don't take cash or a credit card with you if you need retail therapy - retail therapy works the very same way if you don't buy it. You will only buy what you have the ability to purchase - and if you don't have money or plastic - you can't buy anything. I know I go to the mall just to get out - and be around people, activity, and nice things.

If you have equity - that doesn't mean that you should use it. Equity isn't going to disappear - BUT - if it does - you don't want to be the one left holding the empty cup labeled 'Equity'.

Student loans are a pain - but if you are earning more money than you would without a degree- then you know it is a necessary evil!

Credit cards can be brutal - you can afford almost anything with a credit card! I know we are suckers for 0% finance offers. They're GREAT!

They have used a debt calculator. I guess that's where they go the idea of the Home equity from. It would take more than 10 years to pay off the credit cards (the credit cards have to put on the statement now how many years it would take if you continue to pay the minimum). Anyway, I guess the debt calculator said they could pay the debt in 1/2 the time and save thousands of dollars on top of it. I would imagine 17% to a 5% interest is huge. They have tried to get the interest lowered to no avail because they are never late.

Thanks for the ideas everyone. I have passed them on.

 

[bettymae1121]

I don't like either option, but if I had to choose, I'd choose the home equity option with the understanding that all credit cards (except one) would be cut up and never used again. The remaining credit card would be frozen in a block of ice and (hopefully) never used again. Then use the snowball method on the home equity loan -- the amount she paid towards credit cards and student loans -- to be paid on the equity loan, regardless of what the minimum on the loan is.

This.

I don't like either option, but if at least with the home equity line they are paying less interest. 401k money should NEVER be touched, period. First off if you leave the job the loan is due in full immediately, second you pay taxes twice on the loan (you pay the loan back with after tax money and then get taxed again when you withdraw in retirement). It's also money that is untouchable in bankruptcy so if the poop really hits the fan for them, their nest egg stays intact.

Anyway, the best answer is to buckle down and pay off the CC's ASAP, but if they refuse that option, then the next best thing is the home equity line IF AND ONLY IF they are commited to not running up the CC's again. They need to live debt free from then on out, otherwise they'll have spent the equity in their house and still have 5 figure credit card bills. Not good!

 

[KKB]

A 255K mortgage for a household making $100-125K is not over their heads.
It's a tough call...yes they would save $ if they get a home equity loan...but ONLY if they can say NO MORE credit cards. They need to ask themselves how they got into this situation--if the cards are being using to "supplement" their income to buy things, they will simply find themselves right back in this situation. If they cannot have the willpower to NOT use the cards, then it will cost them LESS money to simply hit the credit card hard with payments.

 

[TomAndLori]

I know Dave Ramsey would ask if they had a Car payment, and if so, get rid of that first.

 

[punkin]

Selling the house is a bit drastic for only $20K debt and a $60K retirement. I will agree with all the others who said that they really should snowball the debt. Go on austerity (I mean no eating out, no toys and nothing new for the house unless it's a real emergency) and put all extras into the debt.

If they do anything else, that CC debt will balloon right back up because they never changed their lifestyle.

 

[crisi]

Definately NEITHER.

The 401k loans are a horrible idea. There are tax consequences if not paid back in a year. Then it becomes a disbursement. Additionally, if they loose a job it needs to be paid back all at once. And its best to look at your retirement savings as sacred - if you get it the habit of borrowing against them, you won't have them.

The house loan trades unsecured debt for secured debt. Do they really want to risk their house to pay off their credit cards? That is exactly what they are doing and one of the reasons a lot of people are getting foreclosed on. Those people bought reasonable houses they could afford, but used their house like an ATM. Learn from the mistakes of others.

Pay off the debt with the cash coming in. Cut your budget as far as you can, bring in more income - it will go faster than you think it will and once you get going, it will be fun. If you can pay off a 401k loan, you can pay off your debt without the 401k loan.

 

[ccgirl]

A 255K mortgage for a household making $100-125K is not over their heads.
It's a tough call...yes they would save $ if they get a home equity loan...but ONLY if they can say NO MORE credit cards. They need to ask themselves how they got into this situation--if the cards are being using to "supplement" their income to buy things, they will simply find themselves right back in this situation. If they cannot have the willpower to NOT use the cards, then it will cost them LESS money to simply hit the credit card hard with payments.

Exactly. They def don't have a huge house. Could they get a smaller one..sure. But, again, they have the equity in this house and houses are so much more now so they would end up with the same mortgage for a smaller house. I think they got into the...I don't car if I con't have cash I am going to buy my "things" because I deserve it and work hard. That's what she told me the other day when I was getting a pedicure. She wanted one too because she works hard then proceeded to charge it.

I know Dave Ramsey would ask if they had a Car payment, and if so, get rid of that first.

They do have one car payment that is paid off in 6 months so I don't think it would be best to get rid of that. It is for an older car. Her hubby drives a beat up truck.

Selling the house is a bit drastic for only $20K debt and a $60K retirement. I will agree with all the others who said that they really should snowball the debt. Go on austerity (I mean no eating out, no toys and nothing new for the house unless it's a real emergency) and put all extras into the debt.

You are right...I think people get confused between need and want. I know I do sometimes.

If they do anything else, that CC debt will balloon right back up because they never changed their lifestyle.

You are right...as I said earlier she just charged a pedicure because she "deserved" it. If they end up with a new equity loan I'm not sure she will change and they will be right back where they started.

Definately NEITHER.

The 401k loans are a horrible idea. There are tax consequences if not paid back in a year. Then it becomes a disbursement. Additionally, if they loose a job it needs to be paid back all at once. And its best to look at your retirement savings as sacred - if you get it the habit of borrowing against them, you won't have them.

The house loan trades unsecured debt for secured debt. Do they really want to risk their house to pay off their credit cards? That is exactly what they are doing and one of the reasons a lot of people are getting foreclosed on. Those people bought reasonable houses they could afford, but used their house like an ATM. Learn from the mistakes of others.

Pay off the debt with the cash coming in. Cut your budget as far as you can, bring in more income - it will go faster than you think it will and once you get going, it will be fun. If you can pay off a 401k loan, you can pay off your debt without the 401k loan.

Ohhh...I didn't realize that and I'm sure she didn't either. Thanks so much for making that point.

Thanks everyone....hopefully this is enough to convince her to cut back on things, maybe get a second job until the debt is paid and not risk the house or the retirement.

 

[TomAndLori]

Well if they can knock the Car debt off quicker than 6 months, then that snowball gets started a lot quicker with a car payment being applied. Maybe they can strive to pay it off early.

 

[Praying Colonel]

I don't like either option, but if I had to choose, I'd choose the home equity option with the understanding that all credit cards (except one) would be cut up and never used again. The remaining credit card would be frozen in a block of ice and (hopefully) never used again. Then use the snowball method on the home equity loan -- the amount she paid towards credit cards and student loans -- to be paid on the equity loan, regardless of what the minimum on the loan is.

Most folks have the best intentions when they consolidate their unsecured debt into a home equity loan, but according to a study Dave cites a vast majority of folks (75-80%, IIRC) who do this end up racking up more unsecured debt, anyway. Maybe these folks will be part of the minority that truly changes their ways, but most don't. Me, I'd just snowball the unsecured debt.

 

[nicolet]

Why would one want to pay the car payment first? You have a car payment at 6% for say 10,000. And a cedit card for 10,000 at 21%. Wouldn't it be better to pay the credit card?