3 Replies Latest reply on Apr 11, 2016 8:13 PM by Monette

    Debt Help

    Brooke Phelps

      Hello,

      I'm deeply in debt. I owe about $410,000 between my mortgage, car loan and credit cards. I've refinanced my home to pay down credit cards in the past. But, they are right back up there and actually worse than before. Do I try to consolidate with one of those companies I keep get offers from or is there a better solution?

      Help, BYP

        • Re: Debt Help
          ElizabethC

          It might be a good idea to meet with a credit counselor or financial planner so you can get an unbiased opinion about best next steps. TIAA-CREF has free financial planners but I don't know if they guide just on credit. I'd start there, since there's no cost. Then, see if you can find the courage to seek help with the spending. I don't mean to sound personal or judgmental, I'm just reacting to your statement about your credit cards going right back up again after paying them off. Some people spend too much when they are bored or lonely. Others eat too much during those times-- everyone has a vice. I struggle with sweets, to be honest. Make yourself a promise to talk with someone this week, Brooke, so you can start putting your mind at ease. Good luck. I'm rooting for you.

          • Re: Debt Help
            Manisha Thakor

            First, I want to congratulate you for reaching out for help. Struggling with extensive debt can feel an awful lot like being pulled under water with heavy weights tied to one’s ankles. So give yourself a high five for simply acknowledging the total number and deciding to take actions to improve the situation.

             

            Now on to the tough love — the root issue that needs to be solved to permanently end your struggle with debt is what in your lifestyle is causing you to be spending more than you can afford (which is the definition of how credit card gets built up).

            Some places for you to investigate:  Did you buy more home than you could afford?  If your total housing expenses (mortgage, insurance, property tax, maintenance, etc) is more than 30% of your take home pay, this is a clue that the answer is yes. Or perhaps you bought more car than you an comfortably afford.  If your car payments, insurance, parking, gas, and upkeep costs for your car are more than 10% of your take-home pay, this signals you’ve bit off more car than you can easily digest. Next up take a look at what kinds of expenses are going on your credit card. Are you stretching to provide experiences for your children, parents, or others that are incredibly kind-hearted and well-intentioned but putting your own finances at risk?  The bottom line is that the only way to permanently eliminate excessive debt is to get your spending back in line with your income.

             

            As to what specifically you should do right now, you will want to focus on: (1) making your minimum monthly payments on all card on time so as not to incur any penalty interest rates or other fees, and (2) add an extra $50, $100, or $150 a month to your credit card payment above and beyond the minimum monthly payment. What you do not want to do is take any more equity out of your home to pay off credit cards. Credit cards are unsecured debt whereas mortgages are secured debt (meaning if you default the bank can take your house).  You do not want to reduce your unsecured credit card debt by increasing your secured mortgage debt. Instead you want to reduce your credit card debt by spending less else where and/or taking on extra part time work (any work will do - part time barista, part time Uber or Lyft driver, etc) to bring in extra money to make those extra monthly additions to your credit card payments).

             

            To aid in this step, there are three books I strongly encourage you to read. Together they will help you get a new mindset about what healthy spending looks like and reinforce your conviction for (and mathematically understanding of) the power of paying off your credit cards. The books are:  The Total Money Makeover by Dave Ramsey, Pay It Down by Jean Chatzky, and Your Money or Your Life by Joe Domiguez and Vicki Robin.

             

            Lastly, I want you to know that getting out of debt is a process of baby steps.  If you can commit to just taking one step each day towards the solution (saving $5, reading a few more pages of one of these books) and you do it every day, over time those seemingly small steps work together to create a powerful momentum that transforms your relationship with money. So don’t feel like you have to solve this in one fell swoop. This will be a process and the magic ingredients for success will be mindset and commitment.

            • Re: Debt Help
              Monette

              Hey there,

               

              I just want to let you know another person is rooting for you, too. I admire you for taking this first step. Keep going.