$100,000 in credit card debt. What to do?

In My Humble Opinion
21

I don’t know what the current rates are though I’d imagine a bank rate would tend to be better than any credit card that wasn’t on some special introductory rate. But my Aunt had some credit card debt and did the consolidation with her credit union, and was very happy with the rate and the service. I had made the mistake of going with a debt consolidation outfit that claimed I would be done in five years, after which I discovered some of my debtors will charging interest and some of my debts hadn’t gone down at all. :smack:

If she does end up paying it off herself, make sure she specifies that anything over the minimum payment go towards the principle and not towards the next month’s minimum.

22

The only problem is that you have to convince a bank to cough up a $120k check, give it to someone with massive credit card debt, and only charge 6% interest. The CC companies are already on the hook, they already wrote those checks, now their incentive is to play nice and make sure the OP’s cousin doesn’t default and go bankrupt.

If she’s making all her payments, and has a good rate on her debt, then she doesn’t need debt consolidation. She needs a plan. A plan that includes a budget so that she can put some money away in savings, pay off her debt, in a timeframe that makes sense. She’s going to have to cut back on her lifestyle. I hear good things about Dave Ramsey, she should look at some of his stuff.

23

I’m coming in to third or fourth or fifth Dave Ramsey. I do hope this scared her into realizing she’s living way beyond her means.

The good news is, she can dig her way out of this. The bad news is, she has to make sacrifices. She’s not going to be living like she’s making $100K for a while.

You need to sit down with her and make a budget. Cut out every piece of fat. She’s going to be buying clothes at Wal-Mart. She’s got her four walls (food, shelter, lights, and clothing) so after her $1000 emergency fund EVERYTHING else has to go to the debt.

Pay off the smallest amount first. No, not the smallest interest rate, the smallest debt. We’re looking for quick successes, and if she can pay off something in about two-three months, she’ll be more motivated to keep going.

We paid off all our credit card debt in just under a year using Dave’s plan. We no longer have credit card debt and are working on Baby Step 3…building up the emergency fund to 3-6 month’s worth of expenses.

I do not believe debt consolidation would help her, since she’s not behind on any payments.

And until she’s straightened out her finances and shown she’s learned her lesson DO NOT LEND HER ANY MONEY.

7 Baby Steps

Why debt consolidation will not address the underlying issue.

24

Missed the edit window to correct:

The Four Walls are food, shelter, lights, and transportation, not clothing.

25

I find it very difficult to imagine someone earning 100k who still can’t pay off debts.

26

The OP hasn’t returned for comment, so I’m reluctant to jump to conclusions. $100K in an expensive locale like San Francisco might not be that spectacular.

27

I find it hard to imagine that, too.

I can believe it’s possible, but I just can’t picture it.

28

It’s extremely easy to understand if you’ve read the OP and realized that the person in question was out of a job for a while. Not that she didn’t go way overboard, but how much she currently earns has nothing to do with the amount of debt she’s in.

29

510 sq feet, $1374/month to rent this apartment in SF, if I’m reading this correctly:

http://www.apartmentfinder.com/San-Francisco-Apartments/Lakewood-Apartments

Of course, 510 square feet is tiny. The initial search brought up only 9 apts available for between $1000-$2000 per month.

http://www.apartmentfinder.com/results.aspx?CCity=San%20Francisco&CCountry=US&CMinPrice=1000&CMaxPrice=2000&CState=CA&CSearchType=1

Suppose she’s making $100K, $70K after taxes, and is renting @ $3K/mo or $36K per year. That’s half her take-home.

A guy I work with said his son graduated and landed his first job (Princeton, NJ, IIRC). When they went out to scout for an apt etc., they learned that the cheapest place to park the car wanted $800/month.

Of course, it’s all about how you decide you’re going to spend it. The son quickly decided that a car wasn’t worth it. It’s hard to say what the woman in the OP is spending it on that we wouldn’t dream of but it’s also possible she lives in an area with an exorbitant cost of living.

OP needs to give us more info.

30

Thanks to all for the great advice. She does live in an expensive area, so the 100k is not a effective a shovel as if she lived in some small town in Ohio. One thing that I suggested she do is make the minimum payments for a few months and start a savings account. That way, if something pops up down the road, she won’t backslide. She’s done that now for a few months and is paying as much over the minimum as she comfortable can. The first thing I had her do is sell her 2006 Grand Cherokee to eliminate the payments and insurance. Instead of getting a used car, I was able to talk her into going without (she lives in the city) and just renting one if she really needed it at some point for the day. I was pleased, and surprised, that she went for this. It gives me hope that she is invested in undoing the damage.

I guess she should talk to her bank just to see what the options are, but I doubt she’ll get a better rate than the ones she has. And I will definitely have her look into Dave Ramsey.

Question: she may stand to inherit 40-50k within the next year or so. If so, what would be the best way to apply that? Should she put it all against the cards with the higher rates? Or should she put some in savings and keep a comfortable cushion? Some other plan?

Also, I’ve told her that the good news is that when she pays everything off, she’ll have great credit. Is that true?

On preview, her rent is $2,300. She won’t be able to do much better than that in this town (SF).

31

IANA credit specialist, but I’ve noticed that when you borrow large amounts of money and pay it all back (with large amounts of interest), companies LOVE you for it. And shouldn’t they? They’d love to have a million customers like that. “Oh, yes, loan her money…she finds a way to pay it back eventually, we recoup the principal, make lots of interest, and it’s ALL good.”

And I think she pays off as much as she can with any inheritance she gets. Unless you’re some whiz-bang stock market analyst, the money she escapes paying on credit cards must be at least as good as anything she would likely invest in.

32

Not commenting on the backsliding issue since I don’t know her, in general maintaining a savings account in the face of debt is foolish. Unless she’s earning interest on her savings equal to what she’s paying in interest on the debt, every dollar she puts in savings is a dollar on which she’s losing money.

33

I’ve heard this advice before, however. The amount of saving is less important than the gesture and the development of the habit. If you don’t start the habit, next thing you know, you’re 45, sitting at the computer in your underwear, chatting on a message board with a bunch of strangers and you still don’t have much in the bank.

34

Just a peripheral note, but I’d recommend helping her find some inexpensive - preferably free - hobbies to keep her mind off things. As a guy in his late teens who just had to face $10.000 in debt due to a major clusterfuck and at the start of it without a job, I can’t describe how much relief and pleasure I’ve gained from things like jogging in the morning or my Culture Centres’ free guitar and painting lessons.

(I now work 12-15 hour days 6-7 days a week, living way under my salary to get the debt cleared before Christmas. Fortunately, I work at a reception with large dead periods meaning I can do quite a lot of coursework at work)

35

Watch your generalizations please. I work for a nonprofit debt counseling agency (one of the nation’s top 5) and the most you will get charged is $50/month to consolidate your debts. That’s hardly thousands, and sometimes it’s even waived for people going through financial hardship. Furthermore, we will not recommend such a plan if it is going to cause further financial hardship as the ultimate goal is long-term self-sufficiency. There are a lot of so-called non-profits that are willing to screw desperate people, but we aren’t all like that. The people I work for genuinely care and you won’t find a more professional or respected agency.

I would advise her first to try to see if the companies will work with her to lower interest rates. Increasingly they are refusing to do so and rather have a 3rd party do it.

Consolidation will most likely temporarily harm her credit, because it takes a couple of months before the companies accept the proposals, but it’s not nearly the kind of damage you’d get with a bankruptcy, foreclosure or repossessed vehicle. She should be able to score a free consultation with a consumer credit counseling agency to find out if consolidation is a good option for her, and what other options she might have. She is entitled to receive this free advice without any pressure to consolidate. Make sure any place she works with is certified by the NFCC (www.nfcc.org) and in good standing with the Better Business Bureau and the Counsel on Accreditation.

36

Thanks, Olive. Does the mere fact that she goes to see one of these people get her put in some database? Right now she doesn’t have anything bad against her other than she has massive debt. She’s always made her payments, even, as I said, robbing Peter to pay Paul.

Would you be willing to share the company you work for. If not, maybe you can list the top five and let me know whether you think them all equally helpful/honest.
Thanks.

37

Given the overall state of the industry, many would argue that your employer, being a single example out of hundreds, does not adequately buck the trend in such fashion as to render generalizations invalid.
You believe that she can get lower rates than she’s currently getting?
What rates can you forsee her getting.
Additionally, the odds are that she will fail to repay under the terms of any consolidation agreement she reaches, and the damage caused by such consolidation agreements is substantial.
Consolidation agreements generally have a large enough negative impact on the consumer and communities as a whole that they should be banned.
I have met lenders that consider debt consolidation a worse strike on the credit report of a consumer than a bankruptcy.

38

My experience in a similar situation was that the interest rates you can get in those kinds of situations are in the 15-25% range.
Frankly, only an idiot would loan this individual money. The idiots that are inclined to do so are going to charge a substantial interest premium for the very real risk they’re incurring by engaging in this lending.

39

The experience of a friend of mine was that once he had paid off one card, the card company that he had paid off was bending over backwards to get him to transfer other remaining balances back to that card, in one case at 0% for 18 months. What would stop him from paying off one card, then transferring a balance up to the limit of the first paid-off card from a second card, and so on?

(No idea what this would do to a person’s credit limit, but if one card balance is low enough that she could pay it off relatively quickly, this seems like a relatively low-risk method. Combined with drastic cutting of expenses, etc., of course.)

40

Yeah, forget consolidation. The best candidates for consolidation are those who rack up high interest rate debt, yet have a major asset like a home they can use to secure a single loan at a much lower interest rate.

From a return on money standpoint, the best plan is to pay down the cards with the highest interest first, and pay the minimum on everything else. Once the highest card is paid off, start paying off the next highest. And so on. Maintaining a savings account makes no sense, because you’re carrying debt at a higher interest rate as your savings. And it doesn’t even make sense as an ‘emergency’ fund, since paying down your credit card means you have some headroom on the card for an ‘emergency’.

But that’s just the mathematical side. There may be behavioral reasons to use other approaches, but they are going to be different for each person.

The key to the whole venture is to break the habits that led to the big debt in the first place. Your cousin needs to avoid the trap of ‘slipping’ and choosing just to pay the minimums one month so that she can ‘take a break’ and ‘treat herself’ or something. She’s become accustomed to a certain lifestyle that can’t be maintained - the only way to permanently fix the situation is to develop a new lifestyle, and that means totally reprogramming your expectations of what you can afford.

Also, it might not be useful to go completely nuts about repayment - to the point of hardship. Some people can do that, and others can’t. A better plan might be to work out a reasonable payment scheme like 30% of her takehome pay. Set up an auto-payment at the bank to automatically remove it, if possible, so she never even sees the money. That might be hard with many credit cards to pay, but at least she could have the money moved into a ‘debt payment account’ that she uses to pay down the cards. That way it’s not in ‘general revenue’ and it takes a more explicit act to spend that money rather than use it to pay debt.

Once she’s done that, she should make a serious effort to learn how people on her ‘new’ income live - how much they spend on clothes and food, how often they eat out, what kind of car they have, etc. She needs to recalibrate her thinking around her new means - forget the $200 jeans and $500 handbags, and learn to enjoy cheaper items. That sort of thing.

Finally, avoid the trap of ‘waiting’ for that big inheritance to get her out of trouble. I’ve seen that behavior before too. She should instead develop the attitude that she’s going to try to pay down enough of the debt that the inheritance will put her over the top, free and clear.

And cut up all the cards except the one with the best rate. That way she won’t backslide and start removing the little amounts of headroom from each card when she ‘needs’ the extra money. If she’s only got one card left, the worst she can hurt herself is by maxing out just that one.

The other thing she can do to minimize the pain is to tell herself that every raise she gets from now until the debt is paid will go straight to her credit cards. And every bonus. As soon as she gets a raise and gets her first cheque, she should contact the bank and raise her auto-transfer to her debt payment account by the identical amount. Then her lifestyle is maintained, but she speeds up her debt service.