How do I conquer the credit card debt dragon?

December 7, 2006 8:49 AM

How can a young attorney who is clueless about personal finance conquer the credit card debt dragon???

I am a 29 year old attorney. I own my own house (Florida - if that makes a difference). The monthly mortgage payment is close to $1600. I make $4000 a month after taxes. My credit is pretty good. I have always paid my bills on time. I have close to $25,000 in credit card debt that I want to get rid of. A couple of the cards have interest rates over 25%. I bought my house for $259,900 last July and the houses around me are selling for $300,000-$315,000. My goal is to open my own law office but I want to do it after paying down my debt. I am not sure as to the best way to do this. Paying each card off one by one? Taking out a home equity loan? Refinancing? What is the most feasible plan of attack and one that won't take me so long?

Thanks in advance.

posted by workinprogress to work & money (18 comments total)

1) Find a good home equity loan for $25K. This shouldn't be a problem if houses have appreciated as much as you say.

2) Pay off the high-interest credit cards with this much lower interest loan.

3) Most people who do this screw up again because they feel so relieved at having paid off the debt that they just run up their credit cards again. So cut 'em all up and live off cash!
posted by Dee Xtrovert at 8:53 AM on December 7, 2006

Okay, so there's two goals: (1) reduce the interest you're paying, and (2) pay off the debt.

If you've always paid on time, you can call them up and ask for a lower interest rate and they'll probably do it for you. Go through your junk mail and pull out a credit card offer and when you call your current cards tell them you're considering an offer from _____ for a balance transfer at ___%.

Stop using credit cards. Cut them up. If you need to keep one "just in case", freeze it in the middle of a block of ice in the freezer to prevent impulsive use.

Your bank can probably give you a line of credit attached to your checking account that will give you a much better rate than the cards.
posted by winston at 8:58 AM on December 7, 2006

I have had good experiences with http://www.myfinancialadvice.com. the advisor I picked proved competent.
posted by krautland at 9:20 AM on December 7, 2006

+1 to both of the above. A home-equity loan is a perfectly reasonable approach. Moving your balance to a new low-interest card is another—probably less administrivia up-front, but also probably laden with more gotchas once you're in (see frontline on credit cards).

Figure out how much you can afford to pay off every month and do so religiously. Then stop using the card.

It took me two tries to completely stop running credit-card balances, but it's hugely liberating. Once paid off, your goal should be to have a $0 balance every month; really, you should use a debit card for everything.
posted by adamrice at 9:26 AM on December 7, 2006

Of course, if you take out a home equity line to pay off your credit cards, you should immediately become very careful about incurring additional debt, and paying that one on time. You took bankruptcy, right? Well, the home-equity-to-pay-credit-cards solution basically gives your creditor a security interest in your house, whereas before the debt was unsecured (and Florida, if I recall correctly, has a huge-ass homestead exemption. Look into that). So in a way, you're increasing your risk significantly by rolling that credit card debt onto your home.

Of course, if you can decrease the interest rate from 25% down to 8-10%, then the problem might solve itself. Still, I should think you'd want to look at some zero-or-low interest balance transfer options for at least a portion of that debt before you go and effectively take another mortgage.
posted by rkent at 9:35 AM on December 7, 2006

I would not suggest transfering credit card (CC) debt into your home by obtaining a home equity loan or worse, a home equity line of credit (HELOC). There are several reasons for this which I will lay out.

First, CC debt is in essence an unsecured loan. There is no collateral backing up that debt. If you default on any payments, they cannot immediately come and seize your car, your home, or bank accounts. On the other hand, a home equity loan or HELOC are both secured loans. If you default on those loans, the bank has the right to foreclose on your home. Why would you therefore, take an unsecured loan and change it into a secured loan? It simply does not make sense.

Secondly, HELOC interest rates are tied to the rising fed rates. They are going higher and higher and will surely go even higher. In the long run, they are worse than CCs.

Many people want quick and easy fixes to life's hard problems but that is where many people take a bad situation and make it worse. Just like easy money, it is all a fallacy.

The wisest thing to do here would be something along the lines of what WINSTON said above.

(1) Call up all your CC companies and ask them for an interest rate reduction. Before you do so, have a copy of your 3 credit report and your FICO (or credit score) in hand to show them that you deserve it. You can get a free copy of your credit report once a year at www.annualcreditreport.com. Armed with this in hand, there is a likely chance that your CC interest might get reduced. There is no harm in trying.

(2) There are many CC offers nowadays advertising 0% balance transfers. You might want to open one of these CCs and transfer the balance from your highest interest CC onto this new 0% CC. However, keep in mind that the 0% offer does not last forever. After a while, the interest rate on that card might go back to really high levels. So watch out for that. But in the meantime, you can enjoy the benefit of the 0% rate. In addition, it should be noted that the 0% balance transfer cards often charge a very high interest rate for subsequent charges. Therefore, the new CC should not be used to make new purchases, and is to be used only to pay down the balance transfer.

(3) However you work out the CCs, either with a balance transfer or not, you should always pay off the highest interest rate CC first. All the other cards, you should be paying the minimum until the highest interest CC is paid off. It is the most efficient way to pay them down and will save you the most money.

(4) Lastly, if you want to pay off the CCs quickly, you might want to alter some of your lifestyle choices for a short while. For example, if you used to go out for lunch everyday or out to dinner every night, you might want to cut back and instead, pack lunch for yourself and cook for yourself at night instead. This will save you a lot of money and you can use that money to pay off your CCs. It will be hard, but once you're free and clear of all the debt, you will feel so much better and enjoy going out to eat more than you ever will while you had that debt hovering over you.

(5) As WINSTON said above, cut up your CCs. Not all of them. Maybe leave one or two around for emergencies or stuff online. DO NOT close down the accounts however. If you close down the accounts, your credit score will suffer. Keep them open. Just cut up the cards.
posted by pikaboy202 at 9:38 AM on December 7, 2006

Definitely seek a scheme to consolidate your debt somewhere with a lower interest rate, as people have recommended.

That's tactics. You may wish to also rethink strategy.
posted by Zed_Lopez at 10:08 AM on December 7, 2006

There's some good advice above. Lots more here. Particularly, under the heading Credit Cards.
posted by cribcage at 10:48 AM on December 7, 2006

You have to start by asking yourself how much you can put toward the debt each month. Of course the answer will vary depending on how badly you want to pay these cards off (can you go without hot water), but you need to come up with a number that balances your cash in with your desire to pay off the debt. Find the number and stick to it. See about lowering the interest rates or transfering some balances. Be careful not to transfer balances and then use the cards to buy more, as the higher interest stuff ends up sitting on the card while you pay through the low interest balance transfer.

Take your smallest debt. Not the one with the largest interest rate, but the one with the smallest balance. While paying the minimum on all the other debts, use all the rest of the money in you debt reduction pile to pay on the smallest debt. When it's paid, use all of the money you were paying on that debt to pay on the next smallest debt. Proceed until all debts are paid. The key here is progressively free up money to pay a concentrated amount on one debt. That's why the smallest debts get paid first. The temptation is to take the freed up money and put it back into your budget, but that doesn't really help pay things off faster, so resist that.
posted by OmieWise at 10:50 AM on December 7, 2006

A lot of good suggestions!

Don't take this the wrong way, I'm really not trying to be a jerk, but if your credit was 'pretty good', would you have credit cards with rates over 25%?

That said, the Snowball Calculator helped me in figuring out and planning payments.

You enter the amount you want to put towards your debt each month, and it calculates which one it would be better to pay off first while paying just the minimum on the other(s) and how much in interest you would save etc...
posted by eatcake at 11:09 AM on December 7, 2006

Other people have good suggestions for how to lower the interest rate, then pay it off fast.

I suggest not cutting up the cards later. I have never had a problem with credit cards. They are great for short term cash flow in emergencies and for pure convenience, but you have to pay them off each month in full.

You need a card to rent a car, etc, etc.
posted by Listener at 11:18 AM on December 7, 2006

I'm a youngish (31) attorney in a similar circumstance. I was able to get a low interest rate consolidation loan from my credit union. I think the rate was about 7%. The credit union consolidation loan worked pretty well because it forced me to close my accounts. You may want to see if your bank has a similar deal. I've also transfered some debt to a card with a low introductory APR (this works only if you absolutely pay on time! and you pay the balance off before the introductory APR runs out). I'd suggest putting an application in on lendingtree.com You'll get a number of low introductory rate offers back. I also have my monthly payments programmed in my online banking, so they go out every month without my even thinking about. I was in your circumstance two years ago (probably at about $15,000 in debt at the highest point) and now it's almost all paid off. Good luck!
posted by bananafish at 11:47 AM on December 7, 2006

No matter what, the thing you have to do before anything else is follow the first rule of getting out of holes: stop digging.

If you're continuing to charge expenses in excess of what you're paying them then you're not going to get out of debt. I don't say that to be condescending or because I don't think you're a bright dude, I say it because I've been there myself and I've seen first-hand people doing the same thing.

The only way I got completely out of the habit was to ditch all the cards, flat out, and pay for everything with cash or a debit card. Nothing makes you confront your spending like limiting yourself to only what's immediately on hand in liquid assets.

The other great thing about it is the mental benefit - when you stop adding charges to those cards you start seeing statements that diminish notably. It's more rewarding than you think.

And while Listener may never have had a problem, plenty of people have, and I'd say a revolving charge debt that exceeds half your annual post-tax income qualifies. You can rent cars with debit cards so long as you can stomach the temporary $500 credit hold and with your income you should have a $8,000-$16,000 cash on hand fund anyway. Keeping $2,000 as the low water mark in your checking account to allow for rentals should be doable.
posted by phearlez at 11:48 AM on December 7, 2006

A simplified version of the above, if you don't want to go through the effort of all that good advice, is to figure out which credit card has the lowest APR as well as some deal like 0% on transferred balances. Then transfer the balances off the other cards, and keep only the one card - cut up the others.
Also, try some money-saving tips, easily found in other debt threads, and pay off as much as you can each month.

Again, this isn't as aggressive or effective as the stuff above, just easier.
posted by Sprout the Vulgarian at 12:40 PM on December 7, 2006

You can definitely do this. You're a lawyer, so you're probably getting inundated with junk mail offers to borrow money at low rates. There's no reason you should be paying 25% with your income.

Step 1 is to stop being clueless about personal finance. You're not in law school anymore; you can now catch your breath and take some time to learn about other things. Hit up amazon and buy a book about how not to spend more than you take in every month. If you keep spending more than you take in, you can't get solvent. Therefore you have to stop spending more than you take in. Easy-peasy. If you're one of those people who can't do this without chopping up the credit cards, it's time to do that. You're 29; if you're this person, you should know by now.

Step 2 is to make a plan. Your numbers look reasonable; I imagine that you could pay $1600 on your mortgage, $600 in home upkeep, property tax, utility and trash bills, $300 in groceries and $500 in discretionary; that leaves $700 a month that should be earmarked for paying down your debt and $300/month for emergencies. The numbers I wrote just there might not suit you; what is important is that you do this math, figure out a plan that does suit you, write it out ahead of time (this is called "budgeting"), and then stick to it.

You can keep track of your plan on paper, in an Excel spreadsheet, in a devoted piece of home financial planning software like Quicken, or in a variety of ways. I do it in my head, but if you're not quantitatively inclined that way, you should do it on paper or the computer so you can refer to it when you get confused or new ideas come along.

Okay, now you have a mission statement (balance the budget) and a cash flow plan ($700 a month, or whatever, towards CC paydown.) Step 3 is to negotiate the best terms for your payback. With your income and your future income prospects you shouldn't be paying 25%. Others have given very lucid advice about how to consolidate and get a better rate; you should try *all* of it, shop around, keep a paper record of what you're offered, and take the best offer.

I tend to agree with the folks who said you should keep your creditors away from your real estate; I think I'd probably take a hit of a few percent to keep my loan unsecured, rather than taking a second mortgage/HELOC. This is because the future is uncertain and the best laid plans sometimes go astray, due to injury, illness, or unforeseen circumstances.

This calculator suggests that, if you can get the total interest on your loan down to 11% and pay $700 a month, it'll take 4 years to pay it off. You could reduce that to 2 years if you could swing $1165 per month. Totally doable and well worth it.

Good luck!
posted by ikkyu2 at 6:49 PM on December 7, 2006

Get thee to the library! Find My Total Money Makeover by Dave Ramsey. Everything you need is in there.

If you are in debt, you've spent more than had. To get out of debt, you'll have to spend less than you get. That requires a budget. But don't fret! You've already started!

You said you make 4k a month and spend 1.6k/m on your mortgage. List out the rest of your expenses.

You can be out of debt in less than 2 years if you work this with sincerity and intensity. Ben Franklin said "a penny saved is a penny earned". That means saving is work. It requires denying your desires for something greater. That doesn't come natural to most. It takes effort, concentration over months and months, and a plan. You can do it!

I bet if you are willing to make serious changes, you can send $2000/mo towards that debt. Do it by hard work and careful planning. Refinancing will cost you more money. An equity loan only transfers the debt from one lender to another, it doesn't pay it off. Don't waste your time with those.
posted by kc0dxh at 7:43 AM on December 8, 2006

You need a card to rent a car, etc, etc.
posted by Listener at 2:18 PM EST on December 7

If the poster has trouble NOT using credit cards (which isn't clear) then, instead, a debit card that works like a credit card can be used for car rentals and the like.
posted by joannemerriam at 2:53 PM on December 8, 2006

Just to clear this up, hotels and rental car agencies often insist on credit cards because they want to be able to levy open-ended charges against you in case of damage or whatever. They won't accept debit cards, and (not sure how) they can tell the difference.
posted by adamrice at 4:14 PM on December 8, 2006