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The Debt Adviser

Fast credit card pay-down plan

Dear Debt Adviser:
My husband and I built a home a year ago. We both are working, have about $26,000 in credit card debt and are having a hard time getting rid of it. I looked into a second mortgage (The closing costs are $5,000.) and a home equity loan, but we don't have enough equity yet. Do you have any suggestions to get rid of this debt over the next five to seven years?

Dear Kelly:
Congratulations on your new home. Because you mention a second mortgage and home equity loans, it sounds like you are trying to lower the interest rate on your $26,000 in credit card debt. As you found out, there are often costs involved with this type of borrowing that may not save you enough money to justify them.

Still another thing to consider is that by stretching the debt out over a 30-year loan, you could be paying for these items long after their useful lives. You said it right the first time: Get rid of the debt. You don't want to learn to live with it!

Let's explore some options , using Bankrate's "What will it take to pay off my credit card" calculator.

You have a time frame of five to seven years in which you would like to pay off your debt. For illustration purposes, let's assume your annual percentage rate is 18 percent.

If you want to pay it off in six years, for example, you will need to make monthly payments of $593 beginning today. In six years, you will have paid off the $26,000 balance -- and forked over an additional $16,696.18 in interest for a total of $42,696.18. Ouch!

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To reduce those interest charges, increase your monthly payment to $693 and you save $4,187.91 in interest charges and pay off the balances 15 months faster. Use the calculator mentioned above to play other "what-if" scenarios until you find an amount that fits your budget, but gets rid of the debt as soon as possible.

Another tactic worth trying is to call the credit card companies and ask for a better interest rate and say that you are considering transferring the balance to another card issuer. You may qualify for a better rate! Study Bankrate's credit card rates tables to see what other offers are out there.

If you have good credit and the company won't lower your rate, transfer your balance to a lower-rate card. Beware, though -- credit card balance transfers can be tricky.

Regardless of the course you take, the objective is the same: Pay off your balance as soon as you can. The best way to know what is possible is to review your expenses and contrast them with your income. In other words, create a spending plan. Your mom would have called it a budget. It can be a pain, but it really works to help put you in control of where your money goes.

Keep these tips in mind when you are choosing how you will pay off your debt.

  • Stop charging and borrowing! You will never get out of debt unless you do this.

  • A spending plan will help you avoid adding additional credit card charges while you are paying off the cards.

  • A second mortgage is the same as an equity line or loan. They are all secured loans and your home is the collateral. Defaulting on the loan can put your house in jeopardy.

  • Shop around for equity lines, since they typically have no or low up front costs. If you decide to go that route, make sure you are getting the best deal possible.

  • A savings cushion should be a financial goal if you do not already have one. Strive for three to six months of expenses.

  • However you do it, it will take a plan and discipline. It won't be easy but it will be worth it!

Good Luck!

The Debt Adviser, Steve Bucci, is the president of Consumer Credit Counseling Service of Southern New England. Visit CCCS for additional debt advice or click here to ask a debt question.

-- Posted: Jan. 17, 2003

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See Also
Guide to Managing Credit
FAQ about credit cards
Financial advice glossary
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