<p>I have a friend, let’s call her Sally, who recently confided in me that she and her spouse have a tremendous amount of credit card debt. They don’t live extravagantly, so at first I thought she meant something in the $10,000 range. Well, she clearly needed to vent, as she disclosed that they have nearly $120,000 in credit card debt on 7 credit cards! Their credit card debt almost exceeds their annual income. She tried to refinance and include the credit card debt, as they do have equity in their home, but they were turned down because they have so much credit card debt. Which seems unfair, as they wanted to consolidate everything. She explained that the debt built up over years and was made worse by paying for college - a cautionary tale indeed. She wasn’t really asking for advice, but I can’t get her story out of my mind and wonder what any of you would suggest? She said she makes at least the minimum payment on each card every month and is hoping to really start to pay them off once her youngest daughter graduates from college next year. Any thoughts or suggestions that I could pass along to her?</p>
<p>Maybe she needs to talk to a credit specialist who will on their behalf negotiate lower interest rates with the credit card companies. They in turn will have to pay a monthly sum and not use the cards anymore. Its may be worth it just to have the lower rate.</p>
<p>She should contact a non-profit debt counseling service … Greenpath is a good one. They can help by dealing with the credit card companies, probably lowering the interest rate, consolidating the debt, and making a single payment.</p>
<p>If it were me, I would get a second part time job and use that entire income to wards the credit card debt.</p>
<p>If ALL she is paying is the minimum payment every month, she will NEVER pay off the debt.</p>
<p>Conventional advice is to pay off the lowest balance card first. Then close that account. Divert those not needed payments to the next lowest card…continue until all are paid off. At the same time, pay as much as possible on all,the other cards.</p>
<p>But most important…STOP USING THE CREDIT CARDS!</p>
<p>I have always heard that you should not trade unsecured debt for secured debt if possible. I wish her good luck in getting her debt down.</p>
<p>She might have to consider bankruptcy. She probably will not qualify for chapter 7, but will be able to restructure her debt with chapter 13. It will be very tough 5 years for your friend, but she will come out of it debt free. </p>
<p>The only thing is that if she has student loans in addition to her credit card debt, then she should not be filing chapter 13. This is because she will not be able to make full payments towards those loans; they will continue accrue interest and unlike credit cards will not be discharged at the conclusion of the bankruptcy. </p>
<p>She could also try to negotiate the payoff balance with each credit card. In order to do so, she will need to stop paying on her credit cards. Eventually the credit card companies might agree to accept much smaller pay off (paid in full, no monthly balance) than the balance on credit cards. I personally think it is very risky. YMMV.</p>
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<p>Isn’t conventional advice to pay the minimum on all cards except the one with the highest interest rate, so that any available funds can pay down the highest interest rate principal first and fastest? Then, when that card is paid off, concentrate on the remaining card with the highest interest rate.</p>
<p>Actually, have read both suggestions–pay off smallest first, so you can see progress. Have also read that logically, you should pay off highest interest debt first, since it’s costing the most. Main thing is to stop using credit of any form and reduce spending so more can be paid to reduce debt. </p>
<p>Talking to a non-profit debt counseling service is a great idea–check their fees which should be adjusted for those with few or no assets. Good luck!</p>
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<p>This seems unquestionably idiotic. That’s the actual reasoning? If it had to do with an annual fee it would make sense maybe, but “to see progress” is a completely insane reason. Paying off the highest interest cards surely makes the most sense. If there are annual fees then maybe you do some calculations to determine what your best choice is there, but at 120K I doubt the annual fees would be a big factor. </p>
<p>If she can get any loan on her home equity the interest rate would probably be lower than the credit card loan (I imagine - I don’t really know). But if so, that would probably be a good choice and then use the money to pay off as much as possible on the cards. </p>
<p>If any of the cards are not fully extended, it might make sense to use lower interest rate cards to pay off the higher interest rate cards. </p>
<p>Federal college loans will have lower interest rates than the credit cards, so it might make sense to instead of paying for college directly, using loans for it and diverting all the money that would otherwise go towards college to the cards.</p>
<p>I say this having no real idea of what I’m talking about though. Just intuiting my way through it.</p>
<p>Whether she’s snowballing it smallest to largest or going after by interest payments is not the root of the problem, or the solution. They have a major spending problem! Much like addictions, until they want to fix it and are sick of it and afraid of it and determined to get out of debt nothing will change. They’ll end up running them up again.</p>
<p>I’d highly suggest her reading Dave Ramsey, his first few steps are exactly what they need to get control of their spending/savings.</p>
<p>I agree w the suggestion that she needstospeak w a professional who can help her sort through this I had never heard of Greenpath, but. Looked them up and they do sound like a good first step:</p>
<p>[How</a> GreenPath Can Help You Get Out of Debt](<a href=“http://www.greenpath.com/how-we-can-help]How”>http://www.greenpath.com/how-we-can-help)</p>
<p>Although itis a last resort, this is an instance where bankruptcy could be a real option as it is nearly impossible to get out from a load that exceeds your income unless you drastically cut expenses.</p>
<p>Thank you for the suggestions. I’m hoping to give her a few ideas and some moral support to get through this.</p>
<p>If most of this debt is from paying their child’s college tuition, they would be better off taking Parent PLUS loans for that and putting their money toward that credit card debt instead. The PLUS loans have a much lower interest rate.</p>
<p>Greenpath is a well known reputable credit counseling agency. I know people who were sucked into other ones that weren’t so credible and ended up in worse trouble. I know people who have had great success with Dave Ramsey’s program or Suze Orman’s program. I think they are very similar. </p>
<p>Probably the hardest part is that both spouses have to be on board. </p>
<p>Some people will say NOT to close accounts for cards that have been paid off, but to freeze them in a block of ice in the freezer. Your credit rating is, in part, dependent on available credit so if you close a card as soon as it is paid off, your credit rating still suffers. If you freeze it in a block of ice, or put it in a safe deposit box, you can’t use it impulsively but it can be there in case you really, really need it.</p>
<p>A key thing for them to figure out is what are they spending on? Is it thousands of dollars in medical bills? People should know that hospitals will put you on interest free payment plans if you have a bill and will pretty much accept whatever monthly payment you say you can pay. This is because they have to write off bad debt so often, they’ll take whatever they can get. Putting medical expenses on credit cards is a bad idea. </p>
<p>If they aren’t living extravagantly, it is hard to imagine how this happened. Gambling problem on one of their parts? Tuition payments? Medical bills? Massive home improvements? They need to figure out where their money is going, make a budget, and stick to it.</p>
<p>20 years ago my H and I were $88K in debt from going through fertility treatment for 4 years and then an adoption. I think our gross income was about $50K at the time and I stopped working to be home with my new baby so was more like $35K when we started to dig out (selfish and probably stupid, but after what we had been through to get him there was no way I was putting him in daycare.) We drastically cut back everything - even going to one car (I would drive H to work and pick him up or he would take the bus.) We bought nothing, except for groceries (and I became a very frugal shopper.) We stopped going out for even a bite to eat or a movie. Basically, anything that cost money we gave up. We threw every last penny at our debt. It took 5 long years but we did it. We had no equity in our house to speak of, so borrowing against that wasn’t an option. </p>
<p>You friends need to stop spending on anything except their mtg/utilities and food (that means stuff like cable TV, data plans on cell phones, going out, memberships to anything, gifts, travel of any kind except to work, etc., etc., etc.)</p>
<p>They don’t live extravagantly</p>
<p>Well, something odd is going on because they’re spending all of their $120k+ income PLUS they’ve racked up this much debt. Some people are what I call “invisible spenders”. They don’t have pricey clothes or cars, but they spend a lot on disposable items, convenience items, and services (Starbucks coffees, pricey food items, booze at restaurants, gym memberships, dry cleaners, lawn-care services, etc.) In the end, these folks have nothing to show for their spending habits. </p>
<p>Sometimes the laziest people really indulge themselves with convenience items/services but have NOTHING to show for it. </p>
<p>I agree that bankruptcy may be the way to go. However, they may not be able to eliminate any of the debt that has been racked up in recent months. </p>
<p>I don’t know if this is true, but I’ve heard that if you have to keep a credit card (for REAL reasons, not pricey spending), then pay off one card or keep paying on that card, and don’t include THAT card in the bankruptcy. I don’t know if that’s true, but I heard someone say that this was the way that they could still keep a credit card and rebuild credit. </p>
<p>I would also suggest that if they are able to keep a card, then reduce that max limit. Those cards must have crazy-high limits!!!</p>
<p>A key thing for them to figure out is what are they spending on? Is it thousands of dollars in medical bills</p>
<p>I think that if the debt was from college or medical bills, the friend would have offered that up right away as the reason.</p>
<p>Your friends need to stop spending on anything except their mtg/utilities and food (that means stuff like cable TV, data plans on cell phones, going out, memberships to anything, gifts, travel of any kind except to work, etc., etc., etc.)</p>
<p>This is very true, but only works if BOTH spouses are fully on-board with this. For a short-time I worked in this advising field and when you have one spouse who: A) won’t acknowledge that he/she overspends; or B) won’t acknowledge that some things AREN’T necessities and are actually pricey luxuries (entitlement thinking); and/or C) has a spending addiction…then just telling them to only spend on necessities won’t work.</p>
<p>You might sit down and explore ways that they CAN easily cut back…maybe they buy their Rx’s at pricey pharmacies (you’d be surprised how this can bite into a budget!)…maybe they buy too many convenience items and don’t realize that there are some very easy AND QUICK meals you can make from scratch…maybe they waste gasoline because they don’t “combine trips,” and so forth. </p>
<p>I have a MIL who blew thru a good family business income every year. She was very entitled and thought that it was “just easier” to: have a daily housekeeper, buy prepared foods, have milk, bread, etc, delivered, have a diaper service, have her EIGHT kids buy lunch everyday at school, and so forth. If she had been confronted, she would have insisted that all of those things were necessary.</p>
<p>20 years ago my H and I were $88K in debt from going through fertility treatment for 4 years and then an adoption</p>
<p>Your debt, altho a horrible burden, wasnt’ the result of immature impulse purchases. I think many of us would have done the same to have a child (I’d do anything, I admit that). My point is that you were able to transition into penny-pinching ways because you weren’t crazy spendaholics. </p>
<p>BTW…I think you did the right thing. You can’t put a price tag on a child.</p>
<p>Did you find, mom2collegekids, that one spouse was usually on board and one was the spender? It seems that way in most family’s I know who get themselves to that point.</p>
<p>Your friend can close out some of those credit cards without paying them off completely. By closing out some of those credit cards may make her credit better because she’ll have less open credit line outstanding. Of course, if she has maxed out on all of her credit cards then it won’t help out as much. As an example, if one credit card has 10K credit line and she has 5K balance on it, if she were to close this credit card then she would have used up 5K of her credit not 10K. By having more credit available to her then she may be able to refinance her mortgage to get a better rate and consolidate her debt.</p>
<p>D1 had a credit card with 20K credit line, then she opened up another one with similar amount of credit line with more perks. I told her to close the old one.</p>
<p>I also agree with Thumper that I would take on a second job, especially around the holiday time, to help pay down the balance as soon as possible. With her kids in college, she could do some babysitting for some busy parents during the holiday time or work at a restaurant or store.</p>
<p>What is really sad is that these people are probably still getting solicitation letters in mail from other credit card companies offering them more credit…and the folks owing $100,000+ will maybe get another new credit card to help make the minimum payments on present credit card balances. They need to make some drastic changes to get out of this financial mess.</p>