Need help/suggestions in reducing CC debt.

[Homerboy]

I was unemployed twice in the past 2 years for a total of about 9 months give or take. In that time, besides unemployment checks, and whatever money we could scrape up via odd jobs and selling "toys" me, my wife and 2 kids relied heavily on credit cards to get us through.

Needless to say we racked up some hefty CC balances and now that I have a job we're trying, desperately to get out of that hole. Sadly its not working. The minimum monthly payments are killer and force us to use the $ that would be used on a day-to-day basis (food, gas, diapers... whatever) to pay the CC minimum balances. So, to complete the horrible circle we then have to use our CCs to go buy food or whatever and the great circle of crap is complete. My paycheck covers mortgage, heat, phone and all the CC bills and thats about it. If we just didn't have the lingering CC bills everything would be relatively fine.

Now how to eliminate those bills?... or more so, at the very least reduce them and get us some breathing room.

We have ~25% equity in our house appraised at $195K ... is it wise to take out a 5% equity loan (staying about 20% to avoid paying monthly PMI? This would give us ~$9K at ~5% (much lower than the CC rates) and use that $9k to knock down the total amount owed on the CC and help us at least see a light at the end of the tunnel?

Obviously, we taken "all" the other steps in reducing monthly costs... I ride the bus to work now, cancelled all the extra "perks" we had, we don't eat out, watch the grocery bill, etc etc...

ANY help or suggestions in reducing this debt would be greatly appreciated at this point.

Thanks.

 

[Hoober]

You might try to find a bank or credit union that will let you go over 80% loan to value on your home without charging PMI. I know that Bank One used to have a mortgage like that. Anything you can do to lower your total interest payments is in your best interest and should give you a little extra room for extra money towards principle.

 

[JDub02]

Check out Dave Ramsey's web site.

I went through his Financial Peace Univ. class at my church. He has alot of good tips in dealing with debt.

HTH.

 

[kranky]

First, kudos for recognizing that this is something you need to deal with before it gets out of hand. I'm sorry that you are in this position, but you can overcome it.

I agree with your view that reducing CC debt is essential. Once maxed out, you have no margin for handling an emergency. You said you have done all that's possible to reduce expenses. I'm not second-guessing you, but do you feel confident that you have done everything possible? If you say you have, I'll take that at face value. If you aren't sure, definitely explore that aspect more.

Have you considered a part-time job? It may be your best way to make a fast, deep cut in your CC debt and wouldn't have to be a permanent thing. I'm sure there would be sacrifices involved, but increasing income is essential at such a time. What about delivering newspapers? Vi_edit does (or at least did) pretty well with that and it only takes a couple hours a day in the early morning.

Regarding drawing on your home equity, how much CC debt do you have, and how much would you save monthly by using the equity to pay it off?

 

[dullard]

Yes I think a home equity loan may be a good option for you. Discuss the PMI issue with your lender, you may be able to dip below 20%. But, this is a big but, you can't go back to old ways and spend again. It is painful, but use that money solely to pay off the CC.

Also, have you tried talking to the CC companies? They can be very forgiving. A reduced interest rate will go a long way.

There are tons of other ways to supliment income as well. Kranky got me thinking. Sell plasma, do a medical study, do an odd job here and there, sign-up at a temporary work place for a Saturday job, etc.

 

[theNEOone]

that's pretty tough, how much do you currently owe in CC debt? i'm actually just on my way to clearing all my bill, but i can tell you that the worst possible way to get out of CC debt is to pay the minium payment. you're going to be paying interest for the next 20 years. the equity loan sounds like a good idea, but depends on what interest rate you can lock in. i'm sure it'll be less then 15-20% CC rate though. one thing you should defintiely try and do is transfer your balances to new cards w/ 0% introductory APR (and then, for god's sake, TEAR UP THE OLD CARD.)


=|

 

[Pantoot]

The 80% PMI guideline is for first mortgages. You could do a 100% (and some banks do even more) equity loan without worrying about PMI. That said, as a general rule it is a bad idea to turn unsecured debt into secured debt. Although from what you said the debt was a result of unemployment and not reckless finances, if you do decide to get the equity loan, be wary that many people quickly rack up the debt again.

 

[Platypus]

talk to raiderj's brother

 

[KEV1N]

Any comments about consolidation?

 

[mitaiwan82]

Originally posted by: Homerboy
We have ~25% equity in your house appraised at $195K

:Q please don't take equity from my house...

 

[SuperTool]

Bankruptcy. If you are barely making minimum payments, you will be slaving for the CC company all your life. I don't know how much you owe, but if it's over 50K, I would at least consider that option.
I am not sure I would take out equity to pay off CC's. Why exchange unsecured debt for a mortgage?

 

[Homerboy]

Thanks for all the quick replies guys... I knew the throbbing brain of ATOT could at least help shed some light/help/hope on the situation.

The total debt is ~$20K and technically growing I guess.
I was unaware of the under 80% possibility so I will have to explore that with my lenders. I already submitted emails to the companies/banks I have worked with before and will get on that ASAP.
I plan on calling the CCs this weekend and seeing if I can get a reduced interest rate to help lighten the load even somewhat. $10 is $10. Balance xfers are in the works for new cards too (if I get approved that is)

Of course there are always more and more things that we can do to cut back expenses, but we do need to eat and have the lights on at night But I do agree there still is a few pieces of fat that need to be cut.

Part time job is technically an option... and My wife was looking at getting one. However with 2 little kids (3&1) it becomes quite difficult. In fact she was just offered a job but it would be 3 nights a week from 7-11/12 And the kids get up at ~6am or earlier and I have to be out of the house for work by 7am... so she'd likley drop dead after a bit. As for me getting a part time job that is a possibility... but I do like to see my wife and kids too... I know the $ is important at this stage, but family is too. Its a very hard choice.

My wife does run a small business that she was just doing for fun and for a few extra bucks here and there. We discussed that it maybe time to ramp it up some and use that for an easy, stay-at-home source of income.

 

[Homerboy]

Originally posted by: mitaiwan82

Originally posted by: Homerboy
We have ~25% equity in your house appraised at $195K

:Q please don't take equity from my house...

HAHAHH Edited.

 

[Homerboy]

Originally posted by: KEV1N
Any comments about consolidation?

Actually that is one of my questions... is that an option? What is involved?

I went to http://www.consumercounseling.org and submitted to them, but upon getting the paperwork back its nearly a scam. $8 per account (thats PER CC they "renegotiate"... so $40 per month fees for me) $50 up front and thats to save an ESTIMATED $300 per month payment. I have to sign and pay the $50 before they even negotiate with the CCs... I don't think so.

 

[kranky]

My concern about using the equity to pay off the CC debt is that you will end up back in the same boat. You need to find a way to keep your debt from growing.

Think creatively about the part-time job. Can your wife share baby-sitting duty with another mom? Perhaps your wife could work a couple days a week and let the other woman watch all the kids, then on the other days your wife watches all the kids while the other woman works. That way both women get some part-time income without the added expense of child care.

As you find other ways to cut expenses, reserve some of that savings for the occasional movie rental or trip to McDonalds. If you allow yourself a couple of indulgences, it will be a lot easier to stick to your plan. If people cut everything to the bone without mercy, they quickly come to resent it and tend to turn back to their old spending habits.

I like the work-from-home idea but I don't think this is the right time. I feel you'd be better off with a steady part-time income that starts now, as opposed to something that takes time to build. You only need to do that until your CC debt is under control, and you could still pursue building the work-from-home business.

I completely agree that family is important. In fact, it's paramount. Can you do flextime with your employer, in case moving your hours a bit would help enable her to handle the part-time job at night?

 

[Double Trouble]

Homerboy, a couple of thoughts....

First, be very careful about converting unsecured debt (CC) into debt backed by your house. If something were to happen and you're unable to make the payments on that (relatively small) loan, you'd end up losing your house.

Be very weary of debt consolidation services, many many (if not most) are basically a scam. They will advertise as non-profit, but they are basically preying on the people desperate to get out of the hole. There's nothing a debt consolidation service does that you can't do yourself with a little legwork and reading.

I would not opt for bancruptcy given a relatively small debt amount (~20K). If you do consider it, keep in mind that laws vary a lot from state to state, so do your homework and figure out what it would mean in your state.

A consolidation loan is a very good option, but you have to make absolutely positively certain that you will use discipline and not rack up debt again on your cards once you open up 'breathing room' using a debt consolidation loan. That's the surest way to lose your house and property. You can find lenders that wll let you go less than 20% equity without having to pay PMI, but be careful about what lenders you work with. Many "sub prime" lenders are 'less than reputable', the same way the debt consolidation services (like Ameridebt etc) are.

 

[Homerboy]

Here's one response from a mortgage broker:

If we use an estimated value of $200,000 and originate a $30,000 line of credit, the rate would be Prime + 2.25%. Based on the current Prime rate of 4.75%, the rate would be 7%. The minimum payment you would be required to make each month is the interest or $100, which ever is more.

If you did a fixed rate home equity loan amortized over 30 years, the rate would be 9.3% (payment of $247.89) and a 15 year fixed rate would be 8.93% (payment of $303.03).

The closing costs including an appraisal would be approximately $600 on either the line of credit or fixed rate programs.

I guess Im confused between the line of credit and the loan? I don't fully understand that option.

Also while its good that I can skip PMI at this point, if I took out the full amount to cover my CC (~$25) that would leave only ~$20K equity in my house... 10%. That seems scary as hell to me for some reason.

 

[lightpants]

I was in the same boat as you due to unemployment for 10 months about 2 years ago. I had to use courtesy checks from my credit cards to pay my mortgage. I owed about $32,000 in cc debt. I even had one card at 28%apr, I was paying the minimum on all the cards and my balances were actually increasing every month. I went to my credit union and they gave me a home equity line of credit for 5%apr. They used a 90% loan to value ratio. It cost $500 for the appraisal. I paid off my credit cards, canceled all but one. And I can make double payments on the loan and still pay less then the credit card monthly payments. I am going to try to have it all paid off in 4-5 years. You can do it, just make sure you look at all the fine print. There are a lot of shady companies out there, preying on people in our situations.
Good Luck

 

[kranky]

I would be much more comfortable with zero CC debt and $20K equity than I would with $45K equity and being bled to death by CC debt.

But even if you use your equity to cover the CC debt, can you keep your debt from returning? Is it the CC interest that is making it difficult? I think you have one shot at using your equity to even things up and if the debt accumulates again, you won't have any more bullets in the gun.

 

[Homerboy]

Originally posted by: lightpants
I was in the same boat as you due to unemployment for 10 months about 2 years ago. I had to use courtesy checks from my credit cards to pay my mortgage. I owed about $32,000 in cc debt. I even had one card at 28%apr, I was paying the minimum on all the cards and my balances were actually increasing every month. I went to my credit union and they gave me a home equity line of credit for 5%apr. They used a 90% loan to value ratio. It cost $500 for the appraisal. I paid off my credit cards, canceled all but one. And I can make double payments on the loan and still pay less then the credit card monthly payments. I am going to try to have it all paid off in 4-5 years. You can do it, just make sure you look at all the fine print. There are a lot of shady companies out there, preying on people in our situations.
Good Luck

WOw that damn near identical to my situation.

what about the loan versus line of credit? The line of credit seems very appealing... but what am I missing there?

 

[Homerboy]

Originally posted by: kranky
I would be much more comfortable with zero CC debt and $20K equity than I would with $45K equity and being bled to death by CC debt.

But even if you use your equity to cover the CC debt, can you keep your debt from returning? Is it the CC interest that is making it difficult? I think you have one shot at using your equity to even things up and if the debt accumulates again, you won't have any more bullets in the gun.

Yes its the CC interest is the straw that is breaking the camels back. I mean the principal is no cake walk, but the interest is just the dagger in the heart.

With no interest (or nominal) I could easily start paying off the principal at a respectable rate.

 

[Elbryn]

another option is a home equity line of credit. it sets up a line of credit based on the equity on your home typically at a prime + % rate. it is not fixed like a equity loan where you have to pay X amount per month but more of a revolving line. If the job is seemingly secure enough to pay off the debt over time, converting the cc debt into an equity debt will get you additional tax deductions. you can then calculate that into your w2 number and get more money per month as opposed to a larger yearly tax rebate.
call cc's to see if they will lower your rates is a good idea
if you have a high enough credit score you can score more 0% balance cards

all of this basically entails living with discipline and the desire to get debt free. converting unsecured debt into secured debt in your house, if you are not serious about paying it off will cause problems.

wife could start an ebay business from home part time, scour hot deals here and on fatwallet and resell.

 

[faZZter]

Get a home equity loan and payoff the credit cards. The interest will be much less % rate on the equity loan and it should be a tax writeoff also which further saves you money.

The only thing you MUST do is.....

DO NOT USE THE CREDIT CARDS FOR ANYTHING UNLESS IT IS A HUGE EMERGENCY!!!!!!

Otherwise, like others have said, you will just rack up the debt again and then you will be screwed.

And if you save enuf by doing the loan try to pay back more than the minimum amount on it every month while still letting yourself save a little and pay the normal day to day needs.

Good luck....

 

[Homerboy]

Originally posted by: Elbryn
another option is a home equity line of credit. it sets up a line of credit based on the equity on your home typically at a prime + % rate. it is not fixed like a equity loan where you have to pay X amount per month but more of a revolving line. If the job is seemingly secure enough to pay off the debt over time, converting the cc debt into an equity debt will get you additional tax deductions. you can then calculate that into your w2 number and get more money per month as opposed to a larger yearly tax rebate.

If we use an estimated value of $200,000 and originate a $30,000 line of credit, the rate would be Prime + 2.25%. Based on the current Prime rate of 4.75%, the rate would be 7%. The minimum payment you would be required to make each month is the interest or $100, which ever is more.

Was part of the brokers response to me and the one part I had questions on (see above posts).
Honestly I don't really ever worry about losing the home... my family/inlaws etc would never let that happen, but obviously that is not something I even consider.

FYI Most the CC's are already burned/cut/destoyed and forgotten at this point. Future CC debt is not going to be a issue ever again.

The line of credit really seems to be the way to go... why WOULDNT you use it?

 

[Kibbo]

Consolidate somehow, anyhow, (equity sounds good) so that your payments start cutting into the principle. Cut up all your credit cards except one small one for small emergencies. This is assuming that you have family that could bail you out for big ones, at least until you can get your other cards back.

I once got a card, used it once then put it in a "safe place" in my apt, which I promptly forgot. Couple of years later, I got into trouble with a couple of other cards. Once I had finally paid them off, I called for a replacement on that first card, the limit had increased substancially. That allowed me to have a bit of credit, and start improving my rating right away.