A cousin of mine has gotten herself into some serious debt. Evidently, she had been living rather large over the years, then lost her job and, thinking she’d get another pretty easily (at which she’d be making the very good money she’s accustom to), she lived off her credit cards. She couldn’t get a job right away, then had an injury, blah, blah, blah. Now she owes four credit card companies a total of over $120,000. I did advise her to contact her credit card companies to lower her interest rates, and she was able to get them to now range from 6.9% to 8.9%. Oh, and no savings to tap into. Nor any home equity, as she rents.
The good news is that she’s now back on her feet and has a good job making over $100k per year. The questions are: 1) is there a way for her to consolidate these debts into one that would offer her a lower interest rate that is fixed? 2) If she contacted these people who advertise to do just that, and they are able to help her, would that negatively affect her credit rating. She actually is good about paying her bills and never misses a payment. (Even if she’s had to get an advance on one card to pay off another.) I’d offer to loan her some money at no interest, but I could only do that for a small part of what she owes, so I’m not sure how much it would really help in the grand scheme of things.
Yes, those “nonprofit” types who do the consolidating are a bad idea and they will temporarily affect her credit rating. Plus they will charge thousands of dollars (nonprofit my ass) to do what she can do herself anyway. She only has 4 Credit Cards, so 4 different companies to talk to. Not a big deal. Not worth the hassle of one of those consolidation companies.
How intensely does she want to get out of debt? Is she willing to give up luxuries to pay off that debt? Is the willing to live in a tiny apartment instead of a huge house, give up expensive vacations, travel by bus, bicycle or cheap car, not eat at restaurants, not have cable/cellphone/high-speed internet, etc?
Because that’s what I had to do to get out of my debt. I did a “consumer proposal” (which is an arrangement in Ontario where you pay off part of your debt but are forgiven the rest–I think the equivalent in the US is a Chapter 13 bankruptcy). And my debt wasn’t near that high. I spent five years without fancy vacations or cable TV or more than two pairs of presentable pants to my name.
Either she cuts back voluntarily to pay off the debt, or she does it involuntarily when the debt threatens to overwhelm her.
Edit: on rereading the OP, it sounds like she’s not at the moment close to desperation, but that is critically dependent on her keeping the job. Unfortunately, I can’t say anything about debt consolidation because I never did that.
I don’t really see much detail there, but if I was in that position I’d consult an accountant and a lawyer. Of course, what I would do and what she should do may be two different things.
She will have to give up some luxuries to get out of debt. There is no other way to do this. But if she does it for a few years she’ll be out of debt, and if she gets good habits along the way she’ll stay out of debt.
Agreed that those debt consolidation companies are worthless.
She could approach a bank and see if she can get a debt consolidation loan at a rate that’s lower than the lowest card, but with that much debt and a spotty employment history she might not qualify.
Without knowing how the debt is distributed amongst the various interest rates, it’s hard to know whether it would be best for her to pay off the higher-rate card or the highest-balance card first to minimize the interest she’s paying.
A friend of mine used a debt consolidation thing and spoke highly of it, but that probably depends on which one you use. IIRC his was “Consumer Credit Consolidation” or something “CCC.”
One bit of advice that he said helped him a lot: cut up your credit cards. No new debts, no unchecked spending…go to cash and checks. And she can’t just make the minimum payment.
So I’m guessing she has no assets—stock, 401K, etc. that could be used as collateral for a loan? IANA banker but it seems like you’d need something to secure such a large loan.
My only suggestion is that if she is making $100K per year and has no savings and no home equity, she needs a complete revamp of her budget no matter what her credit card bills are.
She’s probably not going to get any better arrangement than this.
I suspect bankruptcy won’t help, given her income.
Consolidation loans are for the 24% APR crowd, not the 8% crowd.
Check this link for a pertinent calculator:
I’ve had good luck with rolling debt into 0%-1.9% six to nine month promotional rates under different cards. Your cousin may only be able to do this with $10,000-$20,000 dollar chunks at one time, however. This will also depend on credit score, but people who make a lot of money and make all their payments on time often have excellent scores despite massive debt.
So far I have used:
Discover. They worked fine, decent deal.
Carnival Cruise Sea Miles card, the one from Barclay’s. I got an excellent deal on this one, nine months at zero percent with the balance transfer fee capped at $50. Even with the fee that’s less than 0.7% interest for the amount of money I got.
Next I’m going to look at American Express Blue, see if they have any good promotions.
Airline cards also make these offers fairly often. I think my wife used one from Continental although it had an annual fee.
Just be sure to read the fine print carefully. A lot of them have balance transfer fees of 3%, which may not be a very good deal. Many others have a balance transfer fee of 3%, BUT a maximum fee of $50 or $75, which works out to be an excellent deal.
Obviously she needs to make every payment on time, or retroactive interest may apply, etc. Fortunately, in the age of the internet and free automatic bill pay, remembering to make those payments no longer needs to rely on fallible human memory. I just set them up to pay every month at my bank’s website.
Honestly though, 6.9% to 8.9% is already pretty good for unsecured debt. My mortgages are 6.2% and 8.2%, which isn’t much better.
One of the debt counsellors I worked with suggested keeping one card but putting it in a bowl of water in the freezer - if you wanted to use it you had to defrost the card.
I don’t know if there is a US equivalent of this SOA calculator, but it might help her track where she is and how she wants to budget. The Motley Fool might have some articles that could help - the american site has a credit card and consumer debt section.
$100K/yr job is a good start. Take home would be about what, $6K/month?
Could she live off of $2,000 a month?
Even at 6% and sending them a check for $4K/month it’ll take her almost 3 years to pay it off.
She seriously needs to live beneath her means for a while.
Do not use debt consolidation companies. I’ve read a lot about credit repair, I’ve known people who used them, and I’ve even worked as a collector. The best case scenario is that the company will charge you significantly for something you could do yourself, and worsen your credit. The worst case is that they will fuck everything up worse, cause late payments and defaults, and ruin your credit.
One excellent resource is the Credit Info Center Forums:
Pay off all the debt as quickly as possible (e.g. years), using a method like the debt snowball method.
Attempt to settle the debt. This will cost less up front as not all the debt will have to be paid in order for it to be off the table. However, it will hurt your credit significantly, so this means either a much higher payment on loans or waiting for these credit records to fall off the credit report. Credit repair will be needed as typically companies will not settle for much unless the account is significantly past due. This is what debt consolidation companies do - but you can do it by yourself. In fact, when I was briefly a collector, we did not work with debt consolidation companies because we had secured accounts (like furniture), but we would settle. You can get settlements for 80% of the amount even if only a month or two past due, or for as little as 20-30% if longer.
Bankruptcy, which will nuke your credit from orbit, and requires a lawyer and years of painful credit repair. Plus, many creditors (e.g. those she owed money to) will never lend to you again. Obviously this is pretty much the “give up hope” option.
So, ultimately, it’s a personal choice based on a lot of factors. If any of the debt is already in collections, that will affect this. The amount she can (or will) live on per month affects this.
Ultimately speaking she has a years-long struggle ahead of her. She needs to get her credit report (just one - you get one report from each of the 3 major credit bureaus per year - spread them out) from annualcreditreport.com and she needs to educate herself about debt. People have dug themselves out of larger holes, and people have given up with far smaller ones. Her commitment to frugal living, perhaps selling off some of the junk that got her into debt, etc. will be a huge factor.
One personal note in settling debt - she will need a thick skin and some wits. Collectors will try to make you feel bad about yourself, and will ask you a lot of personal questions and try to use the answers against you to get you to pay as much as possible. Generally, though, if they think you have money now and are likely to lose it - such as you’re facing a long-term financial crisis or, worse, bankruptcy - they are very, very likely to give you a good deal. Tell them “I just got a new job and I make 100k a year” and they simply won’t.
If she has a good job now and hasn’t been late on her payments, she could probably consolidate through the bank or get a bank loan. A lot of the debt consolidation places out there are scams (I got burned by one) but usually a bank is pretty straightforward.
She won’t be able to borrow that much unsecured. I will echo what someone else said, to get a financial adviser and an attorney. I have a hunch that all of the observations about the credit consolidation companies are correct. These people advertise and are therefore scraping the bottom of the barrel. They are the equivalent of ambulance chasers.
I work for bankruptcy attorneys, and probably 90% of their business comes from people referred by other attorneys. These attorneys can advise you of all of the intricacies of filing, and there are many.
If she can make more than the minimum payment on all of her credit cards every single month, on time, that might be worth a try, but like others said, she needs to grasp the concept of doing without in the meantime, until they get paid off.