Financial Literacy 2008 - Debt management
credit cards
Releasing debts gives new lease on life

When Greg McBride spoke with Wendy Reck last year, she was over her head in debt and living paycheck to paycheck. She had a balance of almost $16,700 scattered across several credit cards and a $410 overdraft loan on her checking account. To remedy that situation, Greg came up with a plan for Wendy to pay off her bills and jumpstart her savings.

Wendy
Wendy Reck

The challenge: Overwhelmed with credit card debt. Living paycheck- to-paycheck.

The plan: Reduce debt by selling assets and trimming expenses.

Follow-up: Chipping away at debt and feeling more in control.

What did she do?

Reck says that, before the money makeover, when an unexpected bill arrived, she would have to work for an hour to juggle expenses to find a way to pay it. Now, with more savings and fewer bills to pay, she feels more secure about her finances.

Except for Christmas presents, Reck hasn't touched a credit card since speaking with McBride last year.

"I used my Target card to buy all my Christmas gifts, but I paid it off again in January," she says.

Reck currently has one balance of $10,172 being carried over from month to month on one credit card.

To get there she jettisoned the life insurance policy on her husband and used the cash value to pay down some of the credit card bills, including Target and Sam's Club, plus her overdraft loan.

After those debts were paid, she called one of her credit card companies to ask about getting a lower interest rate. When that company refused, she moved the balance to her Union Plus card, where she got a 9.9 percent interest rate for the life of the loan. The balance was transferred in October and by December Reck had paid off the $1,100 that remained with the higher-interest credit card.

The credit card balances disappeared without the benefit of a formal budget. "I have this little piece of paper that I write down the dates that everything needs to be paid, so that's kind of my budget," she says.

Reck also decided to keep buying I-bonds through work, despite McBride's recommendation to discontinue the practice and instead put the money into a high-yield savings account.

"Since that was only $10 a pay period, it's such a minimal amount, I've always enjoyed getting them so I kept them as another little savings," she says.

But she did set up a savings account and plans to keep adding to it. Unfortunately, her savings are temporarily housed in her checking account due to a security breach at her bank.

"There have been people who had their accounts drained, so I didn't want to take a chance, even though it's not a whole lot of money," says Reck. But it's about $400, which is a good start.

Her plan is to save up enough to start an investment account at Vanguard, which requires an initial deposit of $2,000. After that she'll have a portion of her income automatically withdrawn to keep up the investing.

Though she wasn't able to convince her husband to sell any of his cars, she managed to increase her contribution to her workplace retirement account by 1 percent, raising it to 9 percent.

Greg's suggestions
  • Stop using credit cards.
  • Create a spending plan and stick to it.
  • Raise cash by selling stocks, cashing in life insurance and liquidating some extras, such as unneeded vehicles.
  • Stop purchasing I-bonds through work and funnel money to savings.
  • Consolidate credit card debt on a low-interest rate card.

Reck's future plans include paying down her car loan of $1,993 and getting her husband's motorcycle paid off. He gives her money for the $747 loan balance on the bike, which is paid out of her paycheck. After that, she'll attack the $10,172 balance full-force.

Wendy knows that paying down the lower interest rate loans first may not make sense mathematically, but the relief of having them out of the way makes up for the difference of a few dollars.

"It may not be the smartest thing to do, but it is just so gratifying to pay something off and have it completely paid," she says.

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