Suze on Debt
Q: Though my husband and I are struggling to pay off our $4,000 credit card debt, he contributes the maximum amount to his IRA—$5,000 per year, or $417 per month; the account is now worth $19,000. I think he should suspend his IRA contribution until we're debt-free. He thinks the IRA is more important. What are your thoughts?
A: Though I love that your husband is so focused on saving for retirement, you're right to want to get out of debt ASAP. But you're viewing this as an either/or proposition, when you actually have several options.
First off: If you suspend that $417 contribution and put it toward your credit card instead, you could be out of debt in ten months. That's a fine solution. But you could also put money toward both goals. Assuming your credit card carries an 18 percent interest rate, and you're making a minimum required payment of just 2 percent of your balance, your monthly payment is about $80. Continue paying $80 a month, and it'll take seven years to be out of debt. You'll also pay almost $3,500 in interest. Increase that to $375 by contributing $122 a month to the IRA instead of $417, and you'll have the debt paid off in one year—while still saving nearly $1,500 for retirement during that time.
But I think the best idea is to see if you can qualify for a new credit card that will charge you 0 percent interest on the transfer amount for the first 12 months. (Search for deals at creditcards.com.) Pay about $330 a month, and you'll have the balance down to zero within the year. One caveat: Use a transfer only if you won't be charged a balance transfer fee, which could be 4 percent of your transfer amount. Try a credit union credit card—many don't charge these fees.
Finally, you referred to your husband's IRA—but I hope you have a spousal IRA as well. Even if you don't have a paying job, all spouses are eligible for an IRA—provided that the spouse with an income earns income at least equal to the annual contributions. (So if a married couple both contributed $5,000 to an IRA, one spouse would need to earn at least $10,000.) Make sure you're protecting your future just as diligently as your husband is protecting his.
Q: After taking out cash advances on her credit cards, my 81-year-old mother is out $8,000. She lives on $600 a month from Social Security and cannot keep paying on this debt. Can you advise me on how to proceed? How do I get her out of credit card debt?
A: As daunting as an $8,000 debt looks, I'm relieved the figure isn't higher, given your mother's generous nature. A cash advance on a credit card is one of the worst types of borrowing because the interest rate is typically 21 percent or more. It's fruitless to try to talk your way out of this; the card issuer has every right to expect repayment.
To regain control of her debt, have your mom keep paying at least the minimum due on the monthly credit card bill. On-time installments are vital for protecting her FICO credit rating. That's important because if her score is at least 700, she has a good chance of being able to transfer the entire balance to a new card with a lower interest rate. Many card issuers offer zero percent interest for the first year when you move your balance to their card. At CardTrak.com, click on Search Cards, then choose the Balance Transfer Cards link to find issuers offering the best deals. But only sign up for one card—multiple applications made at the same time can actually hurt her credit score.
Keep reading: Suze's credit card debt eliminator calculator
Q: I've got $17,000 in credit card debt, $21,000 in student loans, a car payment, and an interest-only, variable-rate home loan that will adjust in two and a half years. I take in about $37,000 annually. How will I ever be able to save for today, for retirement, for my sons' futures? Where do I begin, and how do I prioritize?
A: Your overriding goal must be to stay current on all your monthly debt. Pay at least the minimum amount due on your credit cards each month, and keep up with the car payment. That should result in a strong credit score, which means you may be able to ask to have your cards' interest rates reduced.
Next, I want you to consider selling your home and moving into a rental. Next, ask your mortgage lender what your payment would be if the adjustment hit today. If the answer scares you, I want you to consider selling. If you can sell and make enough to cover your mortgage and moving costs, I suggest you do it now. The move will give you a better grip on tomorrow by reducing your costs today. Assuming that renting will free up some money, I want you to open two accounts that will help you establish peace of mind: an emergency cash fund and a Roth IRA. When you find full-time work in your chosen field—and you will, stay positive—you can revisit buying a home.
Keep reading: 3 real-life cures for a cash crisis
Q: My husband just discovered that I took out a $125,000 unsecured loan (at 8.29 percent interest) without his knowledge—and needless to say, he's furious. I've suggested that we either refinance our home or take out a home equity loan to pay off this debt. What do you recommend?
A: Your husband "discovered" that you took out this loan—meaning you never told him about it? Your biggest debt is the one you owe your husband, who is a saint for sticking by you. It will take work to regain his trust—you will need to hold yourself accountable from now on and observe one of my first rules of finance: Truth creates money, but lies destroy it.
I'm generally not in favor of exchanging unsecured debt for debt tied to your home, because if you have trouble keeping up with the higher mortgage payments, you could lose your home. The one exception is when you have ample resources, plenty of equity in your home and your intention is to stay in the home for at least five. In that case, it may make sense to refinance if you can qualify for a fixed interest rate of around 5 percent. (The home equity loan at 7 percent doesn't give you enough of a rate reduction over the personal loan to be worth it.) As I write this, the average 30-year fixed-rate loan is right around 4.5 percent. Paying off that $125,000 through a 4.5 to 5 percent fixed-rate mortgage in which the interest is tax deductible is a far better deal than paying 8.29 percent on a personal loan in which the interest is not tax deductible.
Keep reading: 7 deals you should never make
Q: What's the best way to finance a new car? Is it better to finance at the low rates dealers are offering or use our home equity line of credit? The line of credit has a higher rate, but the interest could be deducted on our tax return.
A: You should never use a home equity line of credit (HELOC) for a car loan. When you borrow from your house, it becomes the collateral for the loan, leaving you with the risk of losing your home. Let's say you take out a conventional auto loan and can't keep up with the payments. Worst-case scenario, your car will be repossessed. Call me crazy, but I'd prefer losing a car to losing a home.
Now let's talk strategy. First, be aware that the low rates you see advertised are typically only for borrowers with pristine credit scores (above 720 or so). So make sure your score will qualify you for a great rate. Next, get a maximum loan term of 36 months—no longer. A car is a depreciating asset, so you should put as little money as possible into the purchase. The longer the loan, the more you pay in interest. Lastly, consider a gently used car. Since the most significant drop in a car's value occurs in the first two or three years, buying one that's just a few years old means you avoid paying for those early years of big depreciation.
Q: My husband and I were in a motorcycle wreck. We had no insurance, so I charged our medical bills; now the credit card companies are coming after us. Should we go through credit counseling to reduce the amount of medical debt we owe?
A: Your situation is what 47 million Americans without health insurance have to fear every day: How will they cover their medical costs if they become ill or injured?
If you could manage to pay just the minimum amounts due on your monthly bills, that would satisfy the credit card companies. A credit counseling service (use only someone recommended by the National Foundation for Credit Counseling) can help you out through various means, but not by reducing how much you owe. They charge a ton in fees, and your credit report will be wrecked for years; after all, the creditors are going to report that you repaid only a portion of what you originally owed. But by striving to meet the credit card minimums, your credit scores will improve, which could help you qualify for a lower interest rate (or possibly a balance transfer to a card with a lower rate).
Next, pull out your tax return from the year of your accident. If your total medical costs for that year—not just from your injuries—were more than 7.5 percent of your adjusted gross income, you were eligible to claim all your medical costs as a deduction. If you didn't take advantage of this tax break, look into filing an amended tax return; any rebate can be used to pay down your debt. (But you need to hustle: The deadline to file an amended return is three years from the date you filed the original. I'm assuming you still have a little time because you probably didn't file a return until the following year.)
Next topic: Suze answers your marriage and money questions
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