Paying off credit card debate

[dvcgirl]

They should simply cut their lifestyle and pay off their Credit Card debt. The main stat I would pass along to them is this: Two-thirds of consumers who "consolidate" their CC debt by paying it off with home equity end up right back at the same level of credit card debt within 2 years.

Why? Because they didn't change their habits, they just moved the debt from one place (the credit cards) to another (their home).

Cut the lifestyle and pay off the debt.....by the end of that process they'll never want to use that CC again.

 

[crisi]

If I could offer you a nickel's worth of free advice, it would be not to get too far into this with your friends.

It's awesome that you've been willing to listen to her and that you're trying to help her. That's the service of a true friend. But it sounds like their problem might be a little stickier than just a plain leaky budget.

If things take a wrong turn, it could come to pass that she now feel like she has to justify her spending to you and might begin to resent it or imagine you passing judgment on her, even though you're not.

You, in turn, might start feeling frustrated when they continue to charge things they "deserve" or choose to take the 401k loan even though it's a bad idea.

Money is just so personal. Sometimes getting involved in a friend's financial situation can make things get weird.

I'll second that. It does sound like your friend is in the "juggling money in order to have what she wants, not what she can afford" stage. And an impulse PEDICURE of all things when one is playing that game is not a good sign.

Your friend, regardless of what you tell her, is most likely in for the school of hard knocks. Tie yourself up in it and you will find yourself going along for the ride. If you are lucky, it will just be emotionally exhausting. If you are less fortunate, you'll find yourself with a friendship in tatters. Save the friendship by distancing yourself from your friend's personal business. Nothing you can tell her is information she can't find herself easily from a zillion books and websites when SHE is ready to take the steps.

Now YOU have $.10 worth of free advice.

 

[brota]

I recently signed up for a credit counseling so far I have put two cards into the program 1 rate was dropped to 1% from 15% the other is 9% from 22.9 %. If I pay the min the program requires we will be paid for in 5 years.

This may be a good way to get the debt down faster.

Perhaps they will qualify for a loan mod on their mortgage to get the payment down?

 

[LovableGluttons]

I'm always fascinated by reading these threads about credit card debt, mortgages, vehicle loans, and lifestyle choices.

For every 10 people asked, you'll likely get 10 different responses.



A $255,000 home does not seem excessive if as couple, you ae bringing home $125,000 a yr. Even two vehicle payments and the minimum payments on $20,000 of credit card debt.

But how do you afford everything else? Medical bills, utilities, dental care.

Retirement? We've seen 401Ks take a hit over the last few years. My 403b has not completely recovered.

Food?

What about savings? One big emergency or job loss hits and that $20,000 in credit cards will skyrocket.

I know my way is different too. I know I needed to make mistakes and lose enough sleep early in my life before finding a way that made me comfortable.

My husband and I live off one income while bringing in two. If one of us had to stop working, or lost their job, or could not find work (it took DH two years to find employment utilizing his degree when he retired from the Air Force) we could live fairly easily on one income, it would affect how much we could send to savings, which is painful. I picked up two part time jobs in addition to my full time job as I refused to take us off that path we've been on so successfully for 20 years. But DH found that job! Now I have one full time job and teach a class only spordically for the extra fun money.

I recall a post on this board some time go about a woman's trips to Disney while her kids ate free or reduced lunch at school.

It hit home with me as it made me realize that I don't have good advice to offer. I've taken risks and failed, losing money. My family goes on vacations, I have great jewelry, a beautiful home.

Who knows what may happen. Will it be enough when/if we actually retire?

 

[Alexander]

Well, we are in about the same income bracket, and if we had a $255,000 mortgage and $20,000 in CC debt, I would definately say we were in waaayy over our heads!

If you can only make minimum payments on a $20,000 CC statement, you are in over your head no matter how much money you make. Wow! Minimum payments on $20,000--ouch!

 

[ceecee]

They are in over their heads if they can only make the minimum cc payment, that will take forever to pay off. They need to cut up the cards and you need to stay out of it...you can lead a horse to water but you can't make him drink! No one DESERVES a pedicure!!! Especially if you have cc debt and a mortgage that high!
I work for a dentist and a girl I work with tried to get her friend (a patient) to pay on her bill. She paid $20 and said that left $7 in her checking until next week. The next evening she ran into her friend getting take out at a restaurant ($35). I wouldn't even go to McD's if I had only $7.00 in the checking. Some people just don't get it and never will.

 

[SandrA9810]

I don't think any one has mentioned it. While it might not be the "greatest solution", it would drastically help in their snowball.
From the sound of it, the student loans are probably in the 150-200$ range payments each month. And probably about 50$ in interest each month. One of the things they can do with the student loan, is put it in forbearance. You can continue to make payments, but not required to, for up to one year. And it's also suggested that you pay the interest monthly, as so that does not get tacked on to the principal amount at the end.

That would free up an extra 100$ or more per month, if they pay only the interest charges. They can take that extra money and use that as a start of the snowball.

It might not be the best financial solution, but it'll get the ball rolling. With an extra 1,200$ in the one year of forbearance, they might be able to knock out a credit card or at least pay it down enough that their now minimum payment would be 20$ more than the minimum payment in a year's time. Even 20$ more on a payment can make a huge difference in the life of a CC balance.

 

[Purseval]

If you are making minimum payments on a $20k cc debt I can only imagine 2 reasons for it:

1. You are in over your head and that's all you can afford, or

2. You have no intention of paying it off anyway, just ride it out and keep charging until they take it away from you and write it of as a loss.

I can't think of any scenario where a minimum payment on a debt that high would be considered a sound financial move unless part of your strategy is living off of other people's money.

 

[mrsklamc]

I don't know all the ins and outs but I doubt they would qualify for forbearance with that kind of income.

 

[SandrA9810]

You don't have to provide a reason for forbearance. If you want a deferment (which stops the interest charges), you have to provide adequate documentation to prove your case.

 

[ccgirl]

Man...I had a lot of catching up to do. I do have an update as well. They have cut up all of their credit cards except one. I have given them my opinion as far as taking out a home equity or a loan against the 401K and they agreed it was not a good idea. They are going to change their lifestyle. They can afford to pay more than the minimum they just didn't want to. Anyway...I had told her that I as glad I could offer her advice and help in any way I can but I would prefer we not talk about it any more as it might affect our friendship and our friendship is too valuable for that.

Thank you all again for your advice! Glad she doesn't owe me any money. I learned a long time ago to never "loan" out any money that you expected to get back.

Thanks again for all of your opinions.

 

[ICF]

Forget the snowball....never has made sense. Just because Dave Ramsey says to do it, doesnt make it right (or logical for that matter).

Pay off the loan with the highest rate and then take the car payment money in 6 months and keep paying that amount towards the highest interest rate loan.

And do not, under any circumstance, take from the 401K to pay it off.....

All of that said, I'd say the have a large money management problem and need to learn how to make a budget. If they are making that type of money ($100-$125K) and their mortgage is in the $250K range, they should have extra money to pay off the credit card debt unless there was some 1 time life situation that caused the large amount of CC debt to start with.

 

[JDUCKY]

Man...I had a lot of catching up to do. I do have an update as well. They have cut up all of their credit cards except one. I have given them my opinion as far as taking out a home equity or a loan against the 401K and they agreed it was not a good idea. They are going to change their lifestyle. They can afford to pay more than the minimum they just didn't want to. Anyway...I had told her that I as glad I could offer her advice and help in any way I can but I would prefer we not talk about it any more as it might affect our friendship and our friendship is too valuable for that.

Thank you all again for your advice! Glad she doesn't owe me any money. I learned a long time ago to never "loan" out any money that you expected to get back.

Thanks again for all of your opinions.

Sounds like a great thing they decided to do. Start living well within their means. Sound advice for ANYONE.

As for cutting up the credit cards, I hope they just cut them up instead of just closing the accounts. Closing the accounts can hurt their FICO score over time after those are paid off, esp. if they were opened a short time ago (less than 5 years) and if they have no other open revolving credit. Maximizing FICO involves many many variables and having low revolving utilization across all credit cards (1-7%) and having less than 50% of open accounts carrying a balance is ideal for that segment of one's FICO score.

 

[bumbershoot]

Forget the snowball....never has made sense. Just because Dave Ramsey says to do it, doesnt make it right (or logical for that matter).

Pay off the loan with the highest rate and then take the car payment money in 6 months and keep paying that amount towards the highest interest rate loan.

Hmm, that's exactly what the snowball is. Pay x off, take payment for x and put towards y. Wash,rinse,repeat.

Your only quibble is with the actual order. And since it's *personal" finance that's always allowed to be fiddled with (plenty of fiddlers on llnoe.com), but if you have a supremely LOW balance with a low interest rate, by paying THAT one off you'd get a nice "quick win" that would make you happy and boost your spirits, rather than making yourself wait on that one just b/c it's lower interest. It's a mental game for people who haven't even thought that they could pay extra...makes you happy, makes you want to do it more, and that's better than they were doing before!

 

[crisi]

Hmm, that's exactly what the snowball is. Pay x off, take payment for x and put towards y. Wash,rinse,repeat.

Your only quibble is with the actual order. And since it's *personal" finance that's always allowed to be fiddled with (plenty of fiddlers on llnoe.com), but if you have a supremely LOW balance with a low interest rate, by paying THAT one off you'd get a nice "quick win" that would make you happy and boost your spirits, rather than making yourself wait on that one just b/c it's lower interest. It's a mental game for people who haven't even thought that they could pay extra...makes you happy, makes you want to do it more, and that's better than they were doing before!

And since people who got themselves into trouble often aren't great at math and are often emotionally motivated in regarding to spending - its a winning strategy for a lot of people, even if it isn't the best strategy arithmetically.

 

[ICF]

Hmm, that's exactly what the snowball is. Pay x off, take payment for x and put towards y. Wash,rinse,repeat.

Your only quibble is with the actual order. And since it's *personal" finance that's always allowed to be fiddled with (plenty of fiddlers on llnoe.com), but if you have a supremely LOW balance with a low interest rate, by paying THAT one off you'd get a nice "quick win" that would make you happy and boost your spirits, rather than making yourself wait on that one just b/c it's lower interest. It's a mental game for people who haven't even thought that they could pay extra...makes you happy, makes you want to do it more, and that's better than they were doing before!

When people here speak of the Ramsey "snowball" they always talk about paying off the smallest balance 1st regardless of interest rates and then working your way up to the highest balance.

IMO, people have gotten enough good feelings in most cases by racking up the debt to begin with. As you work to pay off debt, you really should pay off the one costing you the most in interest.

It makes no sense to pay off a $1000 debt at 5% while carrying $10000 at 15%. The 1st one is costing you about $6/mo in interest while the 2nd is costing you $125/mo. Clearly you should make the payment minimum on the 5% and put the extra towards the $10K to try and get that balance gone since it is the one costing you the most money in interest each month.

 

[Marionnette]

When people here speak of the Ramsey "snowball" they always talk about paying off the smallest balance 1st regardless of interest rates and then working your way up to the highest balance.

IMO, people have gotten enough good feelings in most cases by racking up the debt to begin with. As you work to pay off debt, you really should pay off the one costing you the most in interest.

It makes no sense to pay off a $1000 debt at 5% while carrying $10000 at 15%. The 1st one is costing you about $6/mo in interest while the 2nd is costing you $125/mo. Clearly you should make the payment minimum on the 5% and put the extra towards the $10K to try and get that balance gone since it is the one costing you the most money in interest each month.

I agree with you in principle. But your asking people to use reason instead of emotion. If they were inclined to apply reason to there finances to begin with then they would not be in severe debt. Thats why dave ramseys snowballing works so well for some people. It makes them feel good to knock off one debt after another. And by knocking off smaller debts quickly at the beginning of there snowball they are training themselves to be more financially responsible.

 

[Alexander]

Man...I had a lot of catching up to do. I do have an update as well. They have cut up all of their credit cards except one. I have given them my opinion as far as taking out a home equity or a loan against the 401K and they agreed it was not a good idea. They are going to change their lifestyle. They can afford to pay more than the minimum they just didn't want to. Anyway...I had told her that I as glad I could offer her advice and help in any way I can but I would prefer we not talk about it any more as it might affect our friendship and our friendship is too valuable for that.

Thank you all again for your advice! Glad she doesn't owe me any money. I learned a long time ago to never "loan" out any money that you expected to get back.

Thanks again for all of your opinions.

I think you are an awesome friend!

 

[Noah]

I am not familiar with the snow ball method. But what helped my family was John Cummata's Transforming Your Debt to Wealth Audiobook. It's easy and doesn't require a lot of life changes.

 

[ccgirl]

Thanks again, everyone. I should have added that the wife was laid off for quite a while. I think that probably contributed to the cc issue. They just dind't wnat to change their living style when she was laid off.