What's my best road out of debt
July 4, 2009 8:22 PM   Subscribe

I am in debt to the tune of about 20,000 in credit card debt. However, I have great credit, (739) which I've finally cleaned up after a horrible year of ID theft. Most of my debt is on one credit card at 12% APR. I make about 35,000 a year, rent, and don't have any equity or a car. At the rate I can afford to pay at this point (450/month) I'll be in debt for about 8 more years. This seems unreasonable. Should I take out a personal loan, sign up for several low APR credit cards that offer no interest for a year, etc... I live off what I make at this point, and look forward to a credit card-free future. Thanks!
posted by letstrythis to Work & Money (23 answers total) 6 users marked this as a favorite
I'll be in debt for about 8 more years. This seems unreasonable.

Get a second job. A third job could help you pay it off faster.
posted by zerokey at 8:38 PM on July 4, 2009

Those lower interest cards can make a difference, yes. I have one that's 1.89 percent on balance transfers. The trick, however, is to find one that has an indefinite payback period. Most allow the transfer for only 9 months or something and then the interest skyrockets. In my experience (I'm in Canada), the indefinite ones have around a 5 percent interest.
posted by You Should See the Other Guy at 8:45 PM on July 4, 2009

A line of credit account at your bank would probably have the lowest interest rate. It would be revolving credit, like a credit card, but you could use it like a checking account. If you use it as your main bank account, where you make your deposits, then all the money you have that you're not spending is going towards reducing your debt. If you have your pay direct-deposited to this account, then you don't even have to think about remembering to make the minimum payment every month.
posted by winston at 8:47 PM on July 4, 2009

20k at 12% paying $450 a month comes up at almost 5 years.

Low interest/0% balance transfer cards can make a huge difference and by my estimation, shave approximately a year off that 5 year figure.

There will be a balance transfer fee, usually about 3%. You'll take a small hit on your credit score applying the cards, but by making a dent in your debt, it shouldn't mar your score too bad.

Tax return money and any additional income goes to the credit cards. If you can get a second job, do that.
posted by jerseygirl at 8:56 PM on July 4, 2009 [4 favorites]

Can you re-arrange your life, expenses and income to cut the repayment period by at least half? I know this economy sucks, but can you find additional work? Can you sell stuff on Craigslist? Can you make a strict cash budget and stick to it?

Applying for several low APR cards may really ding your credit score, and really, you don't want to get into the open/close/rotate credit card trap, especially after just cleaning up after identity theft. Maybe, MAYBE, opening ONE additional card can give you some breathing space, but you'd have to be making this choice at the same time that you were really cutting back on expenses and maximizing your income. You can't coast on rotating credit.

On preview: a line of credit may be an option, but keep in mind that the LoC interest rate is typically pegged a little above prime, so if interest rates go up, so does your LoC rate. Paying down your debt aggressively now should be a priority.
posted by maudlin at 9:00 PM on July 4, 2009

You didn't mention how you got into the debt, but the other thing I want to suggest is living very frugally.

- if you dine in restaurants or get take out, stop.
- combine coupons with the weekly grocery sale circulars. You can really get some deals. If you eat a meat, dial that back a bit because it's expensive.
- bargain shop at discount retailers like Dollar Store for home cleaning supplies, cards, gift wrap, and some kitchen supplies like zipper bags, plastic wrap, etc.
- if you have cable - cut it back to basic or dump it altogether
- make your home more energy efficient if you're paying electricity or heat. Use CFL bulbs, get a fan for the bedroom instead of running the air conditioner for the entire apartment, throw on a sweater/sweatshirt/socks in the winter and dial back the thermostat a couple degrees, etc.
- utilize the library for books and movies and free museum passes
-do a lot of the "Do I need this or do I want this?" questioning when making a purchase. Seriously scrutinize clothing and electronics purchases.
- lunches are brought from home, always. Allow yourself a reasonable splurge at the end of the month as a reward.
- put all credit cards in a Tupperware full of water and keep it in the freezer. You can get to them if you have to in an emergency, but they aren't on hand for impulse buys.
posted by jerseygirl at 9:14 PM on July 4, 2009 [1 favorite]

And it's going to be a bummer initially. But like any diet, once you start seeing results, you'll hopefully be encouraged by your regiment and want to keep it going.
posted by jerseygirl at 9:16 PM on July 4, 2009

Best answer: if interest rates go up, so does your LoC rate

and so, faster still, will your credit card rate. Credit cards are designed for convenient, short-term debt; they're crappy things to be carrying long-term debt on. You shouldn't have much trouble finding some kind of bank loan that's substantially cheaper than any credit card.

Talk to your bank, local credit unions, and other banks, in that order. Explain what you want to do, and ask what they can offer to help you do it. When you've talked to enough financiers to make you tired, sign up with the organisation whose proposed solution will get you debt-free fastest.
posted by flabdablet at 9:21 PM on July 4, 2009

You mentioned ID theft. Is the money you still owe your all your debt?

Also, is it likely that your income will remain static for the foreseeable future? If not, then set a debt reduction target for each year. This year you can afford to pay $450 per month, but it's not going to reduce your overall debt by a lot because of the interest rate you're paying, so restructuring the debt in some way does seem to be the best option.

I believe that in the US some credit card providers will reduce your interest rate if you simply ask them to - this on it's own would be an advantage to you. You really want to avoid revolving credit as much as possible at this point, so I would look into how much of the credit card debt you can convert to some other form of finance at a substantially lower rate. Zero interest deals usually come with enormous penalty fees, and generally aren't a good deal unless you can pay off the whole of the amount transferred within the zero interest period.

Because your level of unsecured debt is so high compared to your income, you may find refinancing your debt at a decent rate difficult - don't just take the first deal you find that seems OK because there are often hidden fees which would have a huge impact when you have such a small margin of error to work with.
posted by Lolie at 9:27 PM on July 4, 2009

Response by poster: Thank you to everyone for the good advice! I am most interested in the loan option, I think. I've learned to despise credit cards, and signing up for more seems unwise. Anyone have any wisdom on if I'm more likely to get a better deal with Bank of America (my bank and main creditor) or another big bank and/or local credit union? Thanks again!
posted by letstrythis at 10:24 PM on July 4, 2009

Your credit card provider may cut your credit limit after you've paid off a large portion of the debt - don't stress about that because you can always get it increased again at a later date. The company I was working for a few months ago was doing that all over the place, but it wasn't happening as randomly as it might have seemed to customers - they just tightened up their delinquency policy when the economic crisis hit.
posted by Lolie at 10:45 PM on July 4, 2009

You don't mention credit counseling. If you find an accredited non-profit they can put you on a debt management plan that may reduce your interest rates, in some cases to 0%, for the duration of the plan. Additionally they can help you with budgeting and other financial literacy so you won't fall back into the same trap.

Should I take out a personal loan

That's the same trap.
posted by dhartung at 12:05 AM on July 5, 2009

In general, credit unions tend offer better rates than big banks. Talk to your bank (BofA), at least one credit union and at least one other lender. You should get at least three quotes and preferrably five.

I don't have a citation but the Bay Area Checkbook, a nonprofit, did a study on how many bids you should get for various services. More specifically, knowing the prices of all the bids they collected, what is the probability that you would get a lower rate if you requested more quotes. At five, the chance that you already had the best (or near the best) rate in hand was pretty good. Even at three, the odds are much better than just getting one quote. So for a big ticket item like this, I would try to get at least five options.
posted by metahawk at 12:10 AM on July 5, 2009

You don't mention credit counseling. If you find an accredited non-profit they can put you on a debt management plan that may reduce your interest rates, in some cases to 0%, for the duration of the plan. Additionally they can help you with budgeting and other financial literacy so you won't fall back into the same trap.

This can be a bad idea if the debt is manageable and the borrower has good credit. My reading of the OP is that the debt is manageable but the poster wants ways to pay it off more quickly without taking much of a credit history ding.

I agree that some kind of financial literacy course is a good idea, though - way too often people choose the easiest way of borrowing over the best way of borrowing, and only look at alternatives once there's already a problem. Just because someone will lend you more than you can afford doesn't mean that borrowing it is a good idea.
posted by Lolie at 12:22 AM on July 5, 2009

Response by poster: Thanks everyone! lolie, you are correct. My good credit rating is my 1 saving grace at this point and I am loath to damage it. Also, I fully intend to pay back every penny I've borrowed. That being said, I'm keen to avoid as much interest on that loan as possible.

I've been living without credit for the better part of a year now, and I feel like I have the budgeting well-implemented.

When I started racking up all this debt I was in university, thinking that upon graduation I'd be making so much money that I'd be able to pay off any credit card debt quick and easy. This thinking got me where I am today. I hope to get a higher paying job in the not too distant future, but for now I'm making plans based on my current salary.

I'm happy to have so many people offering helpful advice. Thanks again.
posted by letstrythis at 12:41 AM on July 5, 2009

Credit counseling might be the best option. You're credit rating will take a pretty big hit but the credit counseling people would likely get your creditors to stop charging interest and possibly even reduce some of the debt. Since it'll take between 5-8 years to pay off all this debt anyway, taking a hit on your credit for 5-7 years might be worth it, especially if you don't have to worry about a new car or new rental in the meantime. You would have to pay the credit counseling people a fee for their services, but if they save you thousands of dollars interest it would probably be worth it.

Taking a personal loan won't be better and probably won't even be possible. Without substantial collateral you probably won't find a bank that will give you a loan for so much money. It will be considered an unsecured loan and your interest rate would probably be about 17%. You can get a car loan for 5% but any unsecured loan has the same interest rate as credit cards. The only thing that is better about a loan is that your debt would definitely be paid off at the end of the loan. If you've noticed that even the $450 doesn't seem to be getting you anywhere then the loan, even with a high interest rate, might be worth looking into.
posted by wherever, whatever at 12:42 AM on July 5, 2009

Have you tried actually calling your credit card company and speaking to a repayment specialist? It might help if you negotiate directly with them.
posted by Happydaz at 12:53 AM on July 5, 2009 [1 favorite]

As the bank is your major creditor, they may actually be willing to give you a personal loan - one advantage for them in doing so is that personal loan insurance would cover some of the contingencies which might cause you to default and that it's for a finite amount over a finite period of time.

If you owed the same total to multiple creditors, then the personal loan route wouldn't be a viable option, but this is one of those rare situations where it really might be. You haven't said that you're in default on your credit card or other financial commitments, just that it's the time period it will take you to pay it off which is your major concern. You're also not suggesting that you will default if you can't get lower monthly payments. I'd talk to your bank and see what they're prepared to offer. If they come to the party, great. If not, you can continue as things are now or you can go the credit negotiation route.

All credit counsellors are not equal, so you might want to think beforehand about how much you'd want to save in interest over the next few years for you to consider the ding on your credit record worthwhile - ideally, you want maximum benefit for minimum damage.
posted by Lolie at 1:09 AM on July 5, 2009

Frankly, many people in such a situation find that their financial solution is "Mom's basement". That, and/or an interest-free loan from a family member.

Do banks really hand out $20k unsecured loans to people these days?
posted by gimonca at 1:42 AM on July 5, 2009

Will you be getting regular raises at work?

I was once in a similar situation. Had lots of previous credit card debt, very good credit, fairly low interest rates (would sometimes rotate the balance between cards to get the promo balance transfer rates), etc. It looked like it was going to take 5 years to pay off the balance. I was prepared to go the five years, depressing as that seemed. Thankfully though my income slowly went up and I was able to throw lots more money at the balance. I perhaps was spending too much each month on the balance, my lifestyle didn't change much despite the fact that I could technically afford "nicer" things, but seeing the finish line get closer and closer was exciting. I reached a debt balance of zero much faster than the expected five years.
posted by 1001 questions at 2:03 AM on July 5, 2009

Do NOT go to credit counseling except as a last resort. It will ding you and ding you bad with your credit rating.
posted by St. Alia of the Bunnies at 9:12 AM on July 5, 2009

Seconding the second job idea and speaking to your bank about lowering your interest rate. Even with your outstanding FICO score, $20k in credit card debt will raise red flags with a lender about your ability to manage your finances. Also, unsecured loans generally have a higher interest rate than 12%.
posted by garden hoe at 10:48 AM on July 5, 2009

Call your credit card company and ask for a lower rate. They may not go below 12%, but it's worth the 5 minutes it will take to try.
posted by theora55 at 11:12 AM on July 5, 2009 [1 favorite]

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