Getting out of Debt Advice

[Menotti80]

In the last 4 months, I have been trying to formulate the best plan to buy a house and get rid of my debt at the same time. My plan is sort of working, but not well enough. Please bear with the length of this post, and if you have any advice, it would be much appreciated...

Background:
As of June 2009:
- I have ALL student loans paid off from college (Marquette). So no large, long term debt.
- I had $550/mo car payments (was 23 months into a 36 month no interest pay-off plan)
- this payment was slowly killing me. it was very hard to save, and admittingly i was not cutting my spending enough...
- I also had debt racked up on 3 credit cards. 2 of the 3 cards were small-ish amounts, and 1 was bigger.
- I then decided to buy a house
As of August 2009:
- My first step was to combine the remaining 13 months of car payments and the 2 small credit card balances and refinance at Landmark. So I stretched out that money owed over 5 years and have a monthly payment <$250.
- I started to cut my spending. These 2 things helped
- I bought a house on August 21st, which drained any savings I had.
- I also got engaged a few weeks earlier.

Current Situation:
- High balance and high/increasing interest on remaining credit card along with mortgage is still making it hard to save AND pay off CC with monthly payments much more than the minimum payments.

Question:
- Would it be a good idea to try to roll my remaining credit card balance into the loan i have through Landmark? This essentially would double my monthly payment to Landmark, but it would also mean it seemingly would make my monthly payments the same each month, and it would be easier to budget my expenses. (The interest paid would seemingly be less over the long run)
- If I could do this, it would allow me to start saving for a wedding and even use the $8,000 tax credit for the house to pay for the a good chunk of our wedding and also build up some savings...
- This seems to make sense for me, but why would the credit union let me roll the credit card into my current loan? When I did my original refinance, I was able to use my car as collateral because the car was worth more than the remaning balance on the car + my 2 smaller credit card balances. Adding this big credit card balance would put the amount of the loan over the value of my car...

What should I do???
Any recommendations/suggestions/advice/constructive criticism would be helpful... Thanks!

edited some formatting

[MHgb]

I'm not qualified to give any financial advice, but listen to The Dave Ramsey Show podcast (Free!).

 

Let me get this straight...You helped cut your spending by 1) buying a house and 2) getting engaged (buying a ring). I love my house and I love my wife, but I want to be able to take care of them both, and if I don't have money to do that because I have escalating debt because I can't control my spending, then I'm going to lose both.

 

Hope this helps in some way.

 

Beans and rice, rice and beans.

[Menotti80]

thanks MH! i know that sounded backwards; i didn't mean to imply buying a house and getting engaged saves money. but cutting spending allowed me to get a ring and afford the increase cost of living...

[JJHardy7]

Have you received your $8k yet?

[Menotti80]

i mailed in the forms around 9/1, so i probably wont be getting the $8k till around Christmas time

[JimH5]

I'm at a different stage in life than you. . .married 20 years, student loan debt long since retired. . .Have nothing but mortgage debt now. . .

 

But I'm still going fully into debt reduction, at least as much as I can.

 

We have a 3 priority approach, with our daughter's 529 plan getting some, and then spending a big chunk on extra mortgage principal, with the rest being set aside for future improvements.

 

I recognize that a lot of financial advisors think mortgage debt is no big deal, but with employment so tenuous for so many, I can't see putting the house at risk.

 

Plus, the analysts are all over the place on where they think the market is going. . .The daily forecasters are so inconsistent. . .At least I know that extra mortgage money is going to reduce the big number.

[drezdn]

One thing that helped me get out of debt (mostly) was reading the advice on http://www.getrichslowly.org/blog/

[craigharmann]

Agreed with the Dave Ramsey advice. Sell stuff you don't use, cut your expenses, take on a 2nd job if you can. Do NOT roll your credit cards into another loan. Take your lowest balance, pay as much as you can extra on that, while still paying minimums on the others. Then roll that over into the next. That's what we're working toward, and hopefully in the next 3 years, we will get rid of about $25,000 in bills, credit cards and loans.

[1992casey]

Would it be feasible to consider a wedding in the $1,000 range? That way, you'd have $7,000 of tax credit to put toward existing debt instead of incurring additional cost.

[Menotti80]

i wish, but i'm afraid it will take a much bigger chunk out of that $8k

[olliegjw]

Agreed with the Dave Ramsey advice. Sell stuff you don't use, cut your expenses, take on a 2nd job if you can. Do NOT roll your credit cards into another loan. Take your lowest balance, pay as much as you can extra on that, while still paying minimums on the others. Then roll that over into the next. That's what we're working toward, and hopefully in the next 3 years, we will get rid of about $25,000 in bills, credit cards and loans.

Close. Actually, you should pay minimums on all but the card with the highest interest rate. Once that is paid off, work on the next highest interest rate, until they are all paid off.

[homer]

Doesn't Ramsey recommend you pay off the small balance cards first regardless of interest rate? I thought his reasoning was that it was a mental victory to actually have a card paid off which makes staying on a payment plan easier to maintain.

 

Or something like that....

[JJHardy7]

Doesn't Ramsey recommend you pay off the small balance cards first regardless of interest rate? I thought his reasoning was that it was a mental victory to actually have a card paid off which makes staying on a payment plan easier to maintain.

 

Or something like that....

 

That's what I've heard he says. He actually lives really close to where I work...I heard he's almost done on a house that is over 15,000 square feet!

 

I personally think ollie's strategy makes more sense though, but I'm sure it all depends on the individual.

[craigharmann]

Doesn't Ramsey recommend you pay off the small balance cards first regardless of interest rate? I thought his reasoning was that it was a mental victory to actually have a card paid off which makes staying on a payment plan easier to maintain.

 

Or something like that....

Exactly! The biggest thing that I've learned from Dave Ramsey is the common sense stuff that the world around us doesn't follow. Save money until you can afford to pay for things. Plan for emergencies, because they WILL happen.

[JimH5]

I haven't heard Ramsey in awhile, but I think his recommendation is to pay off the smallest balance card first (regardless of the interest rate) to build the psychological momentum to take on the next card, and the next one after that, etc.

 

The methodology maybe doesn't make the most financial sense if you include the differences in interest rates among your cards, but I think his theory is that you're more likely to stay loyal to the effort if you have little victories at the beginning. He also recommends cutting up cards (and closing credit accounts) as you go through the process so that you don't fall back into bad habits.

 

His advice is sound, and he does fine work.

[PeaveyFury]

Do NOT roll your credit cards into another loan.

 

What is the different in interest rates between your big CC and the Landmark loan? To me, it seems wise to get the CC balance to a lower rate, assuming you can't pay the whole thing off in just a couple of months.

[Menotti80]

The credit card rate is more than 3X larger than the rate at landmark. That's why I'm surprised people are saying not to try to roll it all to landmark...

[1992casey]

It seems to me that I heard that debt consolidation loans can lower your credit score. Putting that aside, a reason not to roll everything into your Landmark loan would be the size of the monthly payment. With the credit cards, you can at least pay less than optimum when necessary without getting into trouble with the company.

[olliegjw]

The credit card rate is more than 3X larger than the rate at landmark. That's why I'm surprised people are saying not to try to roll it all to landmark...

The problem is that the loan through landmark will be secured with your home. The credit card debt is unsecured. Meaning that if you don't pay the credit card debt, you just have the hit to your credit, and maybe a judgement. If you don't pay the landmark loan, you may lose your house.

[dadofandrew]

The best way to avoid debt is to stay single and not have kids.

 

For those whose ship has sailed, cut up your credit cards except an emergency one. If your Landmark is tax deductible (home equity), certainly move debt to that, as it's tax deductible. If you are a "small" amount in debt, $5-10K, a PT job, one night a week and one day on the weekend, can easily raise your income $4K a year or more even at $7 an hour, and for many of us, the idea of a low responsibility position is a joy.

 

Minor changes in your spending (joining Netflix rather than a movie every week, for example) can save you $80 a month. I would sit down one day and write down all your debts, and make a goal to pay them down, and then revisit that same sheet of paper every 3 months (you can use the change of seasons if you wish). If you are making progress, you will be pumped up and want to continue. If not, you'll have to make changes.

 

Another thing is, you might not be as bad off as you think...many folks add stuff up in their head and think they must be $50K in the red, but when you write it down, you're $35K...it's like you found $15K in the sofa.

 

Or, you could start a blog, and in 6 years or so, it'll be bringing in some ad money.http://forum.brewerfan.net/images/smilies/smile.gif

[Menotti80]

Putting that aside, a reason not to roll everything into your Landmark loan would be the size of the monthly payment. With the credit cards, you can at least pay less than optimum when necessary without getting into trouble with the company.

the monthly payment of the credit card would be higher right now than through landmark... true, as the credit card balance gets lower and lower, the minimum monthly payment would get lower than the landmark payment, but i also would save a lot of money in interest in the long run...

[Menotti80]

ollie, why would the loan suddenly be secured with my home exactly?

 

dadofandrew, thanks for your advice!

[Paul77]

Lots of good advice here. I'll just add this. STOP using credit cards. I recently passed the 2 year mark in not using a credit card. I used to put everything on the card, as much for convenience as anything else. It was a terrible habit and I hope never to repeat those mistakes.

[Menotti80]

Ionve this all gets paid off, I will be using only for emergencies...

[JJHardy7]

For those whose ship has sailed, cut up your credit cards except an emergency one. If your Landmark is tax deductible (home equity), certainly move debt to that, as it's tax deductible.

 

This obviously isn't an end all statement. Depending on the size of the loan and individual circumstances you may never use the interest deduction on your return.

 

Credit cards aren't all bad. My wife and I use ours for many things in order to get more bonus points. I do keep a budget every month though that tracks everything we've spent. I think some of it is just being responsible on day-to-day items. We also pay it off every month too. I understand emergencies and such happen, but I would highly recommend tracking every dollar spent for a month. You'd be surprised where some of it goes if you're not doing this. I know we save a lot more money each month because of that.