Couple wants to conquer credit card debt

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In Bankrate’s Money Makeover series, we commission qualified financial experts to examine the personal finances of willing readers. In this article, Senior Financial Analyst Greg McBride, CFA, talks to a couple from Virginia about their credit card conundrum.


Amy McMullen and her fiancé John Mocello of Virginia are self-described “income rich but cash poor” 20-somethings. With a walk down the aisle less than a year away, they are looking for some guidance on how to prosper financially. Amy, a government attorney and part-time athletics coach, and John, a police officer, have accumulated a lot of credit card debt. They want to move past what Amy refers to as “foolish ideas about wants versus needs” and begin progressing on the path to financial security.

Amy and John
Profile: Amy and John make good money but have accumulated significant credit card debt.
The challenge: The couple has several savings goals, including buying a home and saving for retirement.

The plan

: With time and discipline, they can achieve their goals and prosper financially.


Amy and John list their goals as getting out of debt, buying a house and saving for retirement. A more immediate goal is covering expected wedding and honeymoon expenses in fall 2010.

They’re in the process of getting settled, and not just financially. John recently relocated, following Amy’s move to southern Virginia last year.

Currently renters, Amy confesses to wanting to buy a house as soon as possible. But the primary obstacle is the mountain of credit card debt they’ve accumulated — in the neighborhood of $20,000 each.

The debt picture

As is commonly the case, the issue isn’t just previous overspending that generated the credit card debt, but current lifestyle. After an initial outlay of their monthly expenses, I pressed them further to quantify what they’re spending in other common spending categories. They identified more than $900 in additional monthly expenditures.

They put a set amount in a joint account each payday to cover their joint household expenses, but with few exceptions pay their individual expenses and debts separately.

Both carry student loans with hefty payments, but are fortunate to have low, fixed interest rates.

Amy’s car is paid for and while John has a car loan, neither has new-car fever and both anticipate keeping their present vehicles until the wheels fall off.

Despite striving to pay more than the minimum on their credit cards each month, the payments aren’t much in excess of the minimum because of the large balances. They’re also susceptible to interest rate increases that would push the monthly minimums higher. Case in point: The interest rate on one of Amy’s credit cards is scheduled to increase next month, even though she makes payments on time, and will likely mean a jump of $50 or more in the minimum payment.

Amy has some department store credit cards on which she makes only modest purchases and always pays the balance in full.

Savings goals

Neither participates in their respective employer’s 457 plans, but neither employer offers any matching contribution, so at least Amy and John aren’t missing out on any free money. However, both will be eligible for pensions that are entirely funded by their employers, so the absence of any retirement savings isn’t a major issue now. But they’ll want to harness the power of compounding by starting to build retirement assets while they’re young — before houses, kids, day care and more bills enter the picture.

Amy and John have meager emergency savings, but enough to act as a small buffer for unplanned expenses. Along with spending and credit card debt, insufficient savings is another obstacle between them and their future goals.

Both have medical insurance, Amy through her employer and John through a short-term supplemental policy he picked up to cover him during an interim period following a recent change of employer. Beginning in February, John will be eligible for medical coverage through the police department he currently works for and can then ditch the short-term policy. John also pays a monthly premium for a modest whole life insurance policy, which has built up a cash value.

Key issues:
  • Significant credit card debt.
  • Need for wedding/honeymoon funds.
  • Monthly expenses bloated by discretionary spending.
  • Very little in emergency savings.
  • No retirement savings other than employer pensions.

Next: The plan

The plan

Both are in stable jobs, love what they do and envision being in their careers for a long time. To achieve their goals and prosper financially will take time and discipline.

Develop a budget

Their financial journey begins with budgeting. They need to immediately tighten the belt on discretionary expenses in order to maximize their debt repayment efforts and accumulate funds for their wedding and honeymoon. Cutting spending by a total of $500 per month is of critical importance. Even little things like utilizing flexible spending accounts for medical, dental, prescription and co-pay expenses will generate savings because these expenses are paid with pre-tax dollars. Amy and John can easily measure their progress over time by watching their credit card balances decline and savings account balances increase.

The hard part will be employing the effort and discipline to trim discretionary expenses so they can live on only their base incomes. This is necessary so the additional, fluctuating income they each receive — Amy from coaching, John from working overtime — can be devoted entirely to paying down the credit card balances.

Find money for wedding

Because Amy and John are paid every two weeks, there are two months per year in which they receive three paychecks. Those third paychecks, slated for January and July in 2010, are more than sufficient to fund their expected wedding/honeymoon expenses and still jump-start an emergency savings cushion.

Get rid of debt

When Amy’s CD matures in February, she should put $500 of the proceeds into her savings account and apply the remainder to her credit card debt. John can terminate his whole life policy, take the cash value and do the same thing: put $500 into savings and the remainder toward credit card debt. This will give them some immediate headway toward getting the debt paid off.

With money from the maturing CD, her income from coaching, and the extra funds that will materialize when one of her student loans is paid off in mid-2011, Amy is in a position to have her credit card debt completely erased in two years.

Once Amy’s debt is retired, she can begin making retirement contributions and boosting emergency savings while John pays his debt off.

For John, it will take a bit longer, but he can pay off all credit card balances in three to four years. He can do this by trimming monthly expenses, earmarking all overtime income and most of the cash value of the terminated insurance policy toward his credit card balances.

If they follow through by adhering to this disciplined program of cutting expenses and maximizing debt repayment, the next few years can make a lifetime of difference for Amy and John. Fast forwarding four years, they could be credit-card-debt free, regularly contributing to emergency and retirement savings and closer to reaching the goal of one day buying a home — all by age 30.

From there, they will be in a position to prosper.

The plan in 4 steps
1) Cut expenses and adhere to strict budget.
  • Understand trade-offs between spending and saving.
  • Realign priorities to match financial goals.
  • Cut $500 of discretionary expenses per month.

Tip: Get started by tracking expenses with this spending plan work sheet.

2) Accelerate debt repayment with additional income.
  • Allocate income from part-time jobs toward debt paydown.
  • Apply all but $500 of CD at maturity toward Amy’s debt.
  • Apply $500 cash value of terminated life policy toward John’s debt.

Tip: Use Bankrate’s Debt pay down calculator.

3) Allocate “surplus” paychecks toward wedding/honeymoon.
  • Two months a year, biweekly paycheck recipients get three paychecks.
  • In 2010, this occurs in January and July.
  • Use them toward wedding expenses this year.

Tip: Read Bankrate’s story on 5 ways to cut wedding costs.

4) Once debt is paid, turn attention to savings goals.
  • Start habit of consistent saving for emergencies.
  • Begin salary deferrals into 457 plans.
  • Allocate funds toward down payment on a house.
  • Learn from experience and don’t fall back into debt trap.

Tip: Use Bankrate’s emergency fund work sheet.

This report was prepared by Bankrate Senior Financial Analyst Greg McBride, CFA.