Photo: Robert Trachtenberg
Suze Orman, author of The Money Class: How to Stand in Your Truth and Create the Future You Deserve tells you how to deal with your debts, whether you're simply having trouble figuring out which bills to pay first or considering a trip to bankruptcy court.
Credit Card Debt
Q: My husband and I are working our way out of more than $14,000 in credit card debt. (We didn't pay our bills until we were about to be sued.) We've settled one balance for $9,000, and we're in the process of reducing another one. How can we remove these blemishes from our credit reports and improve our scores fast?
A: Your settlement was merely the second strike to your credit—the first was your delinquency. Honestly, I wouldn't look for a quick fix for your score right now. A higher number might give you easier access to money through extended credit card limits or better loan terms, but you and your husband need to focus on living within your means and examining why you accumulated so much debt in the first place. If you don't deal with the issues that caused you to overspend, you'll just repeat your mistakes.
Ultimately, your score should improve if you maintain a debt-to-credit ratio below 30 percent and pay every bill on time. (Go to MyFico.com to learn more about factors that can affect your credit score.) Unfortunately, there's no way to know exactly how long it will take to repair the damage, but stay vigilant—you'll get there.
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 Credit Cards, then choose Balance Transfer 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.
Next: How to plan your way out of debt