extreme credit card debt

Parent Cafe
101

<p>“busdriver - that’s what fascinates me. I think a lot of people - who may present themselves to their friends and family as having a handle on their finances - are actually in trouble. Look at the government shutdown this past October - and how many people were in a panic at the thought of missing one paycheck.”</p>

<p>I agree. I think many times people think they are juggling everything just fine, and a small change in their life happens, and they’re in trouble. Sometimes, I think they don’t even realize it until they run out of money, and it’s too late!</p>

<p>We have massive, massive amounts of debt. I console myself that it’s all real estate debt (we have rentals), we’re still saving money and paying it down, and we could sell some things and be debt free. But it still nags at me, and annoys us both.</p>

<p>“It just makes me determined to save more and spend less.”</p>

<p>That’s my goal for next year. Our hope is to pay everything off and be debt free in ten years. Listening to other people’s situations, and how they paid off debt is very inspiring.</p>

102

<p>OP, sounds like you and Sally had a great talk and lunch. Best wishes to her and her family as they work to sell their home and pare expenses. Debt is very easy to accumulate, especially if one becomes unemployed and budgets aren’t adjusted. </p>

<p>Am glad H, I, and our kids are VERY debt-adverse. Having as little debt as possible is very freeing and helps with better sleep. </p>

<p>It is important to build and maintain a large enough emergency fund to handle bumps without going into debt. We have one but were encouraged to get a home equity line of credit (which we paid 0 to get and keep open). We don’t anticipate EVER it, but I can see how having if and credit cards and credit card checks could be an irresistible temptation, especially with college expenses!</p>

<p>As always, it seems its much easier to get INTO trouble than OUT.</p>

103

<p>We are also very debt averse. Have lived like the pig who built his house out of bricks ( 3 little pigs). Wish more people would follow the recommendation to have 6 mos of living expenses available in liquid savings for emergencies. While it sounds hard, putting 10% of ones paycheck on savings every month can build a nice cushion. If 10% is too challenging, then 5% is a great start. Totally agree that avoiding debt is much easier than digging out of it. Best of luck to your friend, op.</p>

104

<p>Rockville - you are clearly a very good friend. I’ve lived long enough to know $hit happens in life and it’s scary how long we lived on the edge. Hubby was close with our pastor who told him how most women, me included, need security to feel loved. Not that men don’t, but hubby was way more comfortable rolling the dice, taking risks than I was.</p>

<p>I’m honestly flabbergasted by how cavalier I see people living paycheck to paycheck and not saving a penny for kids college or retirement. And it’s kind of annoying that the non-planners get money I don’t because even in lean times I kept saving for them.</p>

<p>Even very good friends of ours who are very successful don’t believe in paying off their house and have an interest only loan. Say what you will about the nitty gritty few thousand here or there playing interest rate games - having a house paid off certainly gives someone way more freedom with life choices.</p>

<p>We did follow Dave Ramsey’s advice and it took us a long time to get to step 1, the pre-start was to get caught up on bills and set a budget. It was really hard to get there! We’re now on the last couple of steps - we are almost done saving tuition, and my youngest isn’t even in college yet, and we’re less than 2 years from paying off the house. Every paycheck money goes automatically into separate savings vehicles, a tip I read from the Automatic Millionaire. </p>

<p>I have already educated my kids that they will automatically save 10% of every paycheck and learn to live on the reduced amount. </p>

<p>I hope these friends have learned their lesson and take this opportunity to get on solid footing.</p>

105

<p>She can do a no points, no closing costs refinance at the website I gave you. I’ve done this many times. </p>

<p>She loses nothing by refinancing now. </p>

<p>Then if they want to sell the house, they sell the house. </p>

<p>Two totally separate unreleated decisions. </p>

<p>No moral judgements, no regrets, no drama</p>

106

<p>You are quite the advocate for that website! There are some issues related to their ability to qualify for a cash out mortgage loan based on current income that get rather complicated. For that reason and the fact that they plan to sell the house in the next 12-18 months and the fact that they have a low rate on the existing mortgage, they have decided against refinancing.</p>

<p>In addition, the quickest and easiest solution is not always the best one in the long run. Sally is not looking for quick and easy, or she would at least look at bankruptcy. She understands that they need to change some long-held bad habits and reevaluate how and why they spend. She’s not looking for a quick fix - she wants the satisfaction of living frugally and seeing their efforts pay off as they whittle those balances down - and I find that admirable. We mapped out a rough payment plan for each card - and assuming no further charges - they could be down from $120,000 to about $80,000 by the end of 2014. I think she needs and wants to go through this process and will find it gratifying.</p>

107

<p>I am not experienced with the various issues here but, if she has that much credit card debt on several cards, isn’t she paying thousands of dollars of interest every month? Doesn’t she need to do something to avoid that high interest rate as she pays down the debt? Isn’t credit card interest the highest around?</p>

108

<p>This might be an ill advised suggestion, but when my parents got into some credit card trouble they had a friend that ran a debt consolidation company and he set it up for them so their minimum monthly payment was lower and almost all principal, and their credit score didn’t take a hit-- do all debt consolidators work that way or did they get a special arrangement? It’s been years and there were never any consequences for them doing this, they’ve had no problem getting credit since then and it’s not yet paid off. I tried looking into it for my friend and I wasn’t sure if we could trust other companies so we just didn’t look into it further.</p>

109

<p>We have never followed any particular financial guru. (I know different people find one guru or another inspriring–different strokes.)</p>

<p>Living well under our means just seemed like a good idea to H and me. Fortunately S lives well under his means too. He has only had a job for 2.5 years and already has enough in savings and assets to last him at least a year without touching retirement accounts. He has no debt. </p>

<p>It was a huge relief to us to make the last tuition and mortgage payments. It feels like we got a nice raise! :). Planning on traveling a bit while we still can enjoy it! We can live comfortably on savings and assets and hope to leave something to kids and future grandkids.</p>

110

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<p>I have no stake in it, I just haven’t found anything better and have used Amerisave twice, so I use them as a benchmark on what’s attainable. I’ve been refinancing with no points, no closing costs (no-nos) from various sources since the early 90s. I’ve done it over 10 times. The last time, the lender credit was more than my actual closing costs and they put it toward my prepaid escrow accounts which I got back from my old lender. Basically, they paid me to refinance. I think I have to pay income tax on that!</p>

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<p>Are you saying they can’t qualify, or are you saying that the interest rate would be just be high.</p>

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<p>I mean no disrespect, but have you actually done the math for the next 12-18 months. The low rate on the current mortgage doesn’t help much if the credit card interest rate is very high. What’s the current composite rate on the amount they would need. Let X = current mortgage, Y= credit card debt, Z=X+Y. </p>

<p>Let IX be the interest rate on the current mortgage, and IY be the interest rate on the credit card debt. </p>

<p>What would the interest rate be on a no points, no closing costs loan for Z (call it IZ). </p>

<p>How does (IZ) compare to (IX<em>X + IY</em>Y)/Z? If it’s lower, then it’s still a no brainer win. </p>

<p>Your friend can still take all of those other steps to change her life, but the refinancing decision is purely based on the answer to that last question regardless of anything else. It only matters that they are selling the house if they can’t get a no cost loan. Then the costs of the loan would have to be weighed in, but it still might be worth it depending on the interest rate of the credit cards. </p>

<p>I’m just giving you food for thought.</p>

111

<p>^this makes sense to me.</p>

<p>I don’t see how having equity in a house, equaling the credit card debt and paying interest (18%? more?) on the credit card debt every month makes sense. I do think I understand the point someone made upthread about secured/unsecured debt.</p>

112

<p>If I had enough equity in my house to pay off my credit card debt, and I was spending as much in interest every month as it would cost to rent a place to live, and I couldn’t refinance the house to consolidate the debt (mortgage and credit card and whatever else is outstanding) at a very low interest rate, I would put my house up for sale tomorrow. What am I missing here? I never studied economics and I’m interested in the sensible approach</p>

113

<p>Well you still have to live indoors, so you might not find a rental as cost effective as your own existing home.</p>

114

<p>Their credit card interest rates are primarily in the 9.99% - 12.99% range. Some are actually at 0% due to balance transfers, although those will expire soon.</p>

<p>There are two concerns re the refinance. First is qualification. Sally has been on her present job for less than a year. She works in sales, and much of her income is in bonus and commission. Lenders will not consider that income without a 2 year history. They are not going to qualify to refinance their existing mortgage plus the credit card debt on just her husband’s salary and her rather low base salary. Her bonus/commission income can be used to pay down the credit cards for now.</p>

<p>Second is the risk you take when converting unsecured credit card debt to debt secured by primary residence. Let’s say they do manage to refinance and then Sally or her husband lose their job. They could pay the present mortgage payment on one income and stop paying on the credit cards. However, if they refinance and now have a higher mortgage payment, it would be difficult on one income, and now they risk losing their house, unless they sold it very quickly - which would probably mean below market value.</p>

<p>One of the things we discussed was NOT making any hasty decisions. The basic plan is to cut way back on spending, stop using the credit cards and live on cash, and build up more of an emergency fund. Then use the debt snowball method (Dave Ramsey) to pay down credit card debt.</p>

<p>While they are implementing those steps, I also suggested consulting with a bankruptcy attorney - just to see that option and having 2 realtors look at the house, give them a realistic sales price range and discuss any minor cosmetic improvements that would help the house sell for top dollar - things like freshening the landscaping in front, painting the front door, etc.</p>

<p>She is also considering keeping the present mortgage intact and just doing some type of debt consolidation loan for the credit card debt for now.</p>

<p>So - lots of options to consider and this is her decision to make - not mine. I’m here to support her and give her options to discuss with her husband - but they have to do what feels right for them. I don’t want to advocate strongly for any one solution - not my place to do so and I don’t want the responsibility if something goes wrong.</p>

<p>And finally, as a mortgage lender, I just want to say that there is no such thing as a “no-cost” refinance. The lender simply increases the interest rate, which provides a lender credit to cover the closing costs. I originated “no-cost” FHA streamline refis and HARP loans for years and while it was a good program, there is no free lunch.</p>

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<p>I consider that no-cost. I did this all the way down from 11% to 2.75% over 3 houses and 23 years, probably a total of 13ish loans. Every mortgage comes with two embedded options: the option to default, and the option to prepay. Paying no closing costs maximizes the value of the option to prepay. That’s baseline as far as I’m concerned. I’ve only had one mortgage that I kept long enough where I would have been “slightly better off” - like a few hundred dollars - paying points or closing costs.</p>

<p>10% of $120,000 is $12,000 a year in credit card interest! OMG!</p>

<p>If they have equity, I just don’t see how bankruptcy solves anything. </p>

<p>Can they get part of the way there with the maximum amount that they can refinance and then use her commissions to pay down the rest?</p>

116

<p>Without knowing their financial condition and job security, it is very difficult to make a suggestion. You CAN get a stated (no income verification) refinance loan for about 6-7%. That may defeated the purpose and very risky. To me, down sizing is the only way to go in this case and move out of the area may cause commuting hardship.</p>

<p>I think RVM had picked the correct action for Sally.</p>