Credit card debt mounts

Wendy Reck

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired.


Wendy Reck lives in rural Minnesota with her husband. They are both gainfully employed: She’s a postal carrier and he’s a school custodian. They own their home and have no children living at home. Wendy asked for the Money Makeover because her credit card debt doesn’t ever seem to diminish even though she makes her minimum payments every month. Wendy and her husband mostly keep their finances separate, so he is not participating in the makeover.

Wendy would like to save more for retirement, but doesn’t know how to do that when she lives paycheck to paycheck and faces thousands of dollars of credit card debt.


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.

The problem

Credit card debt, overspending and a lack of savings are exhausting Wendy’s finances.

She has $16,700 spread over four cards and $410 on an overdraft loan at 14 percent interest. Her debt load includes a mix of cash advances, balance transfers and purchases, which create multiple balances and APRs on some of the cards. While one of these balances is at a low interest rate of 3.99 percent, other rates range from 13 percent to 24 percent. She has tried to transfer balances to low-rate cards before but has then run up the balances on her cards again. If she does transfer balances again, she wants to close out the other cards to avoid the risk of repeating that mistake.

Perhaps most telling about these various credit cards debts is that Wendy has no idea how she incurred many of them. A balance of $3,635 on one card comes from a Caribbean cruise in the summer of 2005. Other debts are at least that old, and she has no recollection about why the cash advances were needed.

Compounding her current situation, she acknowledges giving money to help out family members rather than using the money to pay her own debt.

Her home is valued at $150,000, and they have a fixed-rate mortgage at 6.25 percent. Although the mortgage balance is just $68,000, it has increased considerably as a result of cash-out refinancing — twice. The first was used to consolidate debt, including a car loan, while the second was used for home improvements. They purposely took a 15-year fixed on their last refinance with the intention of having the home paid off when her husband retires in another 13 years.

She does not have a home equity loan or any other second mortgage. Interestingly, she has never been tempted to take a home equity loan because she doesn’t want to use the home to pay off credit cards. However, she has effectively done the same thing by taking cash out when refinancing on two prior occasions.

Credit card balances
Target $3,690
Sam’s Club $1,260
Chase $6,750
Union Plus $5,000
Total $16,700
*most with APRs over 13 percent

Plenty of transportation options 

They have two car loans, one for a 2006 Scion and another for a 2002 Saturn that her husband drives that was refinanced in June 2006. In addition, they have two Jeeps that are used by her husband only sporadically. Both are owned free and clear. He gives Wendy money for the loan payment on a motorcycle he owns.

They keep their finances separate to a large extent, which Wendy realizes is different than how most people might handle it. Even though there is an imbalance between the amount he gives her each month and the household expenses that must be covered, Wendy is comfortable with this arrangement because she is the primary breadwinner.

Cash flow and retirement strategy need revamping

Symptomatic of the paycheck-to-paycheck syndrome, the checking account balance has dwindled to $450, while an auto insurance bill for $512 is looming. This is where a liquid savings cushion would be valuable, but they have none.

What serves as her emergency savings account are some savings bonds that she purchases through payroll deduction. Unfortunately, these bonds are not appropriate for emergency savings. Savings bonds must be held a minimum of one year and if cashed before the fifth year incur a three-month interest earnings penalty. The redemption value on these bonds is also less than the face value because they are newly issued and haven’t matured yet.

Wendy contributes 8 percent of her pay to a workplace retirement plan. Although she has recently increased this from 7 percent, it was 10 percent a few years ago before she cut back because her debts got too high. She is capturing the full 5 percent employer match. She does not have an IRA, but she owns some individual stocks in a taxable account valued at a total of $1,500.

Wendy and her husband will receive pensions in retirement and remain eligible to collect Social Security. Wendy says she can expect a pension of $900 to $1,000 per month in current dollars if she works until age 60. Her husband will get $421 per month at age 62 from the school board.

Insurance situation

The Recks each have life insurance coverage commensurate with their respective earnings. However, the policy Wendy purchased for her husband is expensive compared to other policies with better coverage. The policy has accumulated a cash value that would net $4,600 after paying a surrender charge, should Wendy opt to terminate it.

Although both husband and wife work in physically demanding jobs neither have disability insurance other than whatever Social Security would provide. Wendy would rely on the six months of sick pay and 10 weeks of vacation she has banked.

Key issues
  • Nearly $17,000 in unsecured debt, most at interest rates above 13 percent.
  • No liquid savings account for emergencies or unplanned expenses.
  • Living paycheck to paycheck.
  • Typically pays only the minimum required payment on credit cards.
  • Works in physically demanding job with no disability insurance.

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

Would you like a Money Makeover? Apply here.

Next: The plan

« Back to the Table of Contents