Dave Ramsey takes on readers

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Dave Ramsey is a busy guy. He hosts a live radio program — “The Dave Ramsey Show” — Monday through Friday, which can be heard on more than 350 radio stations around the country, as well as XM and Sirius satellite radio. Recently he has begun hosting a television program five days a week — “The Dave Ramsey Show” on Fox Business Network — which airs at 8 p.m. Eastern and again at midnight. He answers questions on the fly from callers on both shows.

Despite all his commitments and obligations, Ramsey took time out to talk to Bankrate about how to handle debt. On top of that, he was gracious enough to accept questions from our readers. Below are links to their financial queries; read them as well as his insightful answers.

Click on readers’ questions to see Dave Ramsey’s replies
How can someone unload a time share?
Refinance now or hold out?
What’s good debt and what’s bad?
How can lower the interest on my mortgage?
What is the best way to pay down debt?
To mortgage or not?
What should we do with inheritance?
Debt settlement: good or bad?
How are Fed cuts impacting CD rates?
What is best card for a single person?
How do I escape making payments on two houses?
Why invest?
After one late payment does rate double?
Pay debts or invest?
Do you pay original lenders or debt collectors?
How do I escape an option ARM?
Am I getting bad financial advice?
What’s the best way to tackle debt?
Should I help son with debt?

In 2004, when I was a traveling nurse making good money, I purchased a time share (after some high pressure sales) for which I pay $330 per month for another six years (10 years total). I also pay $99 per month for the maintenance fee, which will NEVER END. I can’t get rid of this thing. I am now remarried and settled, not making big money and need (and want) to part with this property. Additionally, I’m on the West Coast and most of the resorts are on the East Coast. I have spent about $2,000 listing it with three companies who say, “I can sell this for you in three months or less.” Well, that was three years ago and I still own it and pay the bill.

I’m 59 and looking to retire someday. I don’t want my children to inherit this thing, the company won’t take it back, and no one yet has wanted to buy it. Do you have any ideas?

Boise, Idaho


You can try to aggressively sell it through something like eBay. But your best option is to talk to the company that you bought it from. Don’t talk to the lending department or the business division. They are only concerned with the property they own. Talk to a salesperson. Promise an extra bonus or commission if they sell your time share. That will get them motivated and get your time share sold.

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My husband and I have a 5/1 ARM that is three years old. We are getting nervous and want to refinance our home with a fixed-rate mortgage. We have locked in a 5.375 percent rate with our local credit union. Our balance is $229,000 on our home, but it is worth approximately $400,000. Our payment will be a little less, but our present interest rate is 5 percent, so interest will be a little higher. My husband is in the construction business and, as you know, it is greatly affected by the economy. If we wait, we could possibly sell a piece of land and pay off approximately $90,000 on our loan, making our payment lower. Are we jumping the gun by refinancing early? Do you have any suggestions?


The adjustable-rate mortgage and the industry your husband is in have you feeling financially insecure. So, let’s take some of the risk out of your situation. Refinance now. The thing about adjustable-rate mortgages is that they do adjust, but almost never down — they only go up. Get a 15-year fixed-rate mortgage and pay it off as soon as you can. Your interest rate may be a little higher, but the fixed rate will eliminate at least one element of the uncertainty you are feeling.

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I have three major credit cards with Chase that I’m really worried about — all with about $7,000. I have a school loan with about $6,000 and I own a time share (which I love) with about $20,000 left. Right now I feel the time share and my school loan are pretty good debt (whatever that means). My payments are on time and always more than what they are supposed to be. My Chase payments are $250 a month. My question is in another year my husband and I want to buy another home, so I’m trying to save $1,500 a month and pay down this debt.

First question is: Should I be more concerned about paying down debt than putting more money in the bank? (We are both 50 years old.)

Second question is: By the time I buy the home and I have leftover debt, can the debt be incorporated in the mortgage? What can I do with the debt?


You need to get rid of the debt as soon as possible — there is no good debt. When you have debt hanging around, you invite Murphy to move in (if anything can go wrong it will) and he has a tendency to bring his cousins Broke, Desperate and Stupid. You certainly don’t want to move this crew to a new home. Just get crazy and knock out the debt. If your money wasn’t going to Chase and your school loans, you’d be able to save for the house a lot faster.

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How can I persuade my mortgage lender to lower the interest on my mortgage? My credit is 680, excellent payment record, paying interest of 7.25 percent fixed on a $747,960 loan — $5,545.26 per month, including taxes and insurance. Plus a HELOC for $210,000 at 7.6 percent.

San Diego, Calif.


You can’t — that’s not how banks work. You have to get their attention first. Seriously, talk to another bank about refinancing. When you return to your bank and talk about a payoff, they won’t want to lose you and will be ready to talk. Go with the bank that has the best deal. You can get a better interest rate, but watch the closing costs. If you can’t beat your current rate by at least 1 percent, then it’s not worth it.

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What is the best way for me to pay down my debt? Balance transfers? Home equity loan? My debt is around $43K, not including mortgage. My house is worth about $162K; I owe about $121K. My husband and I bought the house approximately two and a half years ago. Please advise.

Warmest regards,

Christy Garland, Texas


The best way to pay down debt is to just get focused and put every dime you have toward knocking it out. How you handle money is 80 percent behavior; it’s only 20 percent head knowledge. Unless you change your spending behavior, you’ll just keep accumulating more debt. First, do a written budget for the month — you and your husband should work together on it so you are both on the same page and committed to it. A budget is your way of telling your money what to do. Then make sure you have $1,000 in the bank to cover small emergencies that will come up while you are getting out of debt. If you don’t have an emergency fund, you’ll be tempted to use debt again. Once you have your emergency fund, list all your debts, smallest to largest — not including your mortgage. Pay minimum payments on all the debts except the smallest and put everything you can toward the smallest. When that one’s paid, move on to the next smallest and so on until you pay off all the debts on the list. We call this the “debt snowball” because as you go down the list you have more and more money to put toward each debt — like a snowball rolling down a hill.

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I’ve been concerned with my dilemma even before the market downturn we are presently in. If my portfolio (very diversified) is around $500,000 plus, does it make sense to maintain a mortgage in the amount of $87,000? My broker from Smith Barney insists that it is a good thing, that the $425 per month interest is OK, since my $87,000 is invested and making (?) money for me. However, I am also paying his commission on that amount each month. In that money I have an annuity worth about $125K, which we are going to start tapping, according to his game plan. Most of the other investments are in munis. May I have your opinion?

Greenacres, Fla.


Pay off the mortgage — get rid of the debt. Your broker is suggesting that your mortgage is making you money because of the tax deductions. But you can get the same deductions from giving money to worthy charities instead of sending money to the bank. The difference is you don’t have the risk of debt and his commissions.

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My husband is due to inherit approximately $200,000. We have a $171,000 mortgage (30 years), and $50,000 in other debts. He doesn’t want to pay off the mortgage, but pay $75,000 toward it, pay off the $50,000 and put the remaining money in a one-year CD. Then in two years he would like to rent out our existing house and apply for a new mortgage. Is this a smart move, or should we just pay off the balance of the mortgage?


I call CDs Certificates of Depression because they don’t get a good return. You’ll get a better return on your money if you use the inheritance to pay off debt. First, tackle the $50,000 in debt and then go after the mortgage. Once the mortgage is finally paid off you’ll have control of your greatest wealth-building tool — your income.

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What are the short-term and long-term advantages and disadvantages to hiring a debt-settlement company to negotiate to settle your debt versus using a consumer credit counseling service to address personal credit issues?
R. Proctor

Warrenton, Va.

R. Proctor,

There are NO advantages to using debt settlement companies. In the short term you pay their fees of 15 percent to 30 percent. In the long run you still have to pay the debt. Your credit report still shows that you have debt. You can do this on your own. List all your debts smallest to largest and start paying them off. Get crazy and knock them out.

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I am trying to keep an emergency fund and it is very discouraging with interest rates going down. I started with 5.05 percent; now it’s 3.6 percent and the Fed will lower it more. How is this helping my money grow?
Ellen Kay


An emergency fund is for “emergencies.” It is not an investment. Don’t worry about what the interest rate is. Leave your emergency fund where it is and invest other money in mutual funds for long-term investing.

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What is the best credit card out there for a single person who just needs one for emergencies but probably wouldn’t be able to pay the whole monthly balance off each month?


There is no good credit card and certainly not for someone who won’t be able to pay it off. If you play with snakes you will be bitten, and having credit cards is playing with snakes. First do a written budget. Most people who start following a budget each month tell me they feel like they got a raise. Use cash to cover your emergencies instead. If you’re struggling to fund your emergency fund, have a yard sale, temporarily get a second job — do whatever it takes to save this money so it’s there for you when you need it.

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Six months ago I was transferred from Tennessee to Virginia. I’ve been unable to sell my home in Tennessee. The asking price now is $10,000 below what I owe on it. I’m renting in Virginia and the Tennessee house payments plus rent have drained all savings. Each month now I’m going deeper in debt. I do not want to declare bankruptcy. I see no way out. Please help!! I’ll do whatever you advise me to do.

Richmond, Va.


Make sure you understand the true value of your house. A local real estate agent can help you get a list of what other houses in the area have been selling for. You definitely want to do what it takes to avoid bankruptcy — it’s a gut-wrenching experience. Your best option is, of course, to just find a buyer for the house, but that isn’t happening fast enough.

You may need to talk to your mortgage company about the possibility of a short sale. That’s where you sell the house for less than you owe and the mortgage company agrees to take that amount without coming after you for the difference. Make sure you get it in writing. Another alternative to foreclosure is a deed in lieu (of foreclosure) where you turn over the deed to the mortgage company; they sell the house at auction and agree not to come after you for the difference. Again, make sure you get it in writing. These will make a mark on your credit history, but nothing as bad as a foreclosure or bankruptcy.

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Why should I invest during the next two to three years?


The sooner you start investing, the more it can take advantage of compound interest. The earlier you start investing, the more money compound interest can make you. Mathematically speaking, compound interest works exponentially or in a geometric progression. In English, this simply means that your money is affected by mathematically multiplied explosion, not by simple addition, such as 1+1=2. Suppose you started investing at age 20 and saved for 45 years until age 65, saving only $65 per month at a 12 percent average annual return (which a long-term growth mutual fund could easily do). In 45 years you would accumulate $1,394,555 for retirement. Compound interest is powerful.

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In December 2007, I was two days late paying a credit card because I had unknowingly put the statement in the paid bills file rather than the to-be-paid file. When I discovered my mistake, I immediately called the credit card company to inform them what had happened and made a payment over the phone. My new statement shows that my interest has been raised from 8.99 percent to 24.9 percent. I had always paid considerably more than the minimum payment. Is there anything I can do to get the credit card company to revert back to the original interest rate?
Name withheld

Dear reader,

You can’t MAKE the credit card company do anything. Read the fine print on your statement — it says they can change the interest rate for any reason. Get on the phone with a supervisor — not the kid in the cubicle. If you’ve never been late before, they should want to work with you. If not, tell them you’re going to transfer your balance to another company. They don’t want to lose your business. Of course, the best thing to do is pay the thing off and be done with it.

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With what’s going on in the stock market, should I pay off some debts or invest?


The stock market has always gone up and down, but it’s nothing to worry about. According to Ibbotson Research, 97 percent of the five-year periods and 100 percent of the 10-year periods in the stock market’s history have made money. That said, if you have debt other than a mortgage, you should always get rid of that first before you focus on investing.

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When repaying “old debts,” those more than one year old, do you pay the original lender or collection agency? Will both report repayment to credit bureaus?

Killeen, Texas


You should communicate with both. Make sure the collection agency is legit — that it’s actually someone the original lender handed your debt over to. After you’ve verified the players, you want to deal with the collection agency — it’s easier. Make sure you get everything in writing. Most of the time, they will report it to the credit bureaus.

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I locked into a bad mortgage, a 30-year payment-option ARM. I borrowed $234,000 in February 2006. I now owe $246,000 at 8.5 percent with an $8,000 prepayment penalty — bad deal on my part. I tried to get out but the vultures are coming in. Every month that I don’t make the high payment, $800 is added to my principal. With the decline of real estate I will be lucky to get $310,000 for it. Got any ideas?


I rarely tell people to sell their home, but in your case you have to in order to get out from under this crummy ARM. $310,000 is a good deal compared to what you’ll end up owing if you stay in the house.

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We are in the process of buying a house. Our financial adviser wants us to put down a minimal deposit (20 percent to avoid PMI), borrow as much as we can at today’s rates (5.5 percent) and give him the balance as he is returning around 10 percent on mutual funds and stock market investments. What do you think?


I think you should consider getting a new financial adviser. I was taught this same myth in college — use lower-interest debt to invest in higher-return investments. The problem is the assumptions used to get to the profit on the investment are wrong. The formula doesn’t factor in risk. The more debt you have, the more risk you take on. The bottom line is that after adjusting for taxes and risk, you don’t make money. I hate debt of any kind, but mortgage debt is the only kind I don’t yell about. Get a 15-year fixed-rate mortgage for the amount it takes to buy the house, then pay off the mortgage as fast as you can. When you have no payments, you can invest like crazy. In the long run you’ll be a lot better off.

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I have two credit cards, one at $6,000 and one at $8,000. Plus a home equity loan of $36,000. I try to make payments well above minimums on all. My question would be, would it be better to make less amount on two of the balances and put extra amount on the lowest balance to pay it off sooner and then transfer that payment to the next and so on? Or just stick to the game plan? Thanks.

Waycross, Ga.


Tackle them one at a time. Pay minimums on the $8,000 credit card and the $36,000 home equity loan while you put every dime you can toward the $6,000 credit card. When that’s paid off, tackle the $8,000 credit card and when that’s gone tackle the home equity loan. Focus is a powerful thing. The faster you pay off one debt, the more motivated you are to attack the others.

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I am a retired senior with about $400,000 in CDs, IRAs and stocks (now falling quickly). My youngest son had accumulated enormous “living” credit card debt while in graduate school. He was earning a starvation stipend as a post doc, while living expenses in Cambridge, Mass., were astronomical: for example $800 + $350 per month for one room and utilities. Consequently, he charged everything else on credit cards. When he finished the program, he had a $25,000 in debt (plus enormous school loans now due), and it seemed as if the only choice was bankruptcy. (He knew the school loans had to be paid.) It also took him quite a while to find a teaching position in academia. He was quite despondent about the whole thing by that point, and had never asked me for any help — so I volunteered to take over the credit card debt. (I’m not sorry about this, as he has been quite heroic about being responsible for his own education, has had much and still has enough on his shoulders.)

OK, I’ve paid the debt down to about $15,000. Interest on it is 9.9 percent. I still have a mortgage of around $100,000 at 5.5 percent. Social Security income plus interest income plus stock dividends amount to about $30,000 per year.

Question is: Should I take my required minimum distribution from my IRA early in 2008 to pay off a chunk of the credit card debt? I would not want to take a distribution of, say, more than $7,000 to put toward this credit card. The IRA is in a “super money market fund” that earns about 5 percent.

Weston, Conn.


We all love our kids and want to help them any way we can. I have three kids of my own — I know how you’re feeling. But, you are a retired senior. You have to live off this money. You are not in a financial position to help your son with this kind of debt. You can help him month to month, but don’t take out a large chunk of your money to throw at this. I’m not saying your son has to file bankruptcy. He needs to find additional forms of income — sell stuff or get a second job — and start paying down this debt. He can do it — he’s obviously a hard worker.

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