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