Laura writes in with the following plea for help with getting out of credit card debt:
I came across your web site today and I love it! My husband was out of work for nearly 2 years. We always had enough money to pay our bills so our credit line was very high. Well, I used it, all of it. I paid the phone, the car, taxes, one credit card paid another and so on. I know I broke every cardinal rule but I did what I had to survive.
My husband is now working. We are paying the mortgage company every week $500.00 to catch up. My credit cards are over $80,000.00.
Here is my question…Now that we are getting back on our feet, how do we square up with the credit cards with out ending up in the same position? I can give them each (all ten of them) 40.00 a month, but that won’t make a dent and I don’t even think they will take that low of an amount.
Laura, thank you for taking the time to share your story. It sounds like you and your husband have had a rough couple years, financially, but there will be brighter days ahead. My first piece of advice has little to do with finances, and more with your relationship with your husband.
I want to encourage you to fully disclose your financial situation to your husband. Perhaps you have already done so, but in your email you indicated “I used it, all of it. I paid the phone, the car, taxes…” I just want to make sure you and your husband understand the situation fully, and understand that while you did what you had to survive, we must now work together to clean it up.
Kudos to you for working to get the mortgage caught up, and for making that a top priority. So many times people in your situation make payments to credit cards before the mortgage payment because some obnoxious credit card collector is breathing down their neck. Prioritize the income you now have coming in putting things like food, shelter, lights, and transportation at the top. You’ll work around to the credit cards when you can, but those things must be paid first.
Consolidate Your Accounts
With ten credit cards you do have an uphill battle, but paying them off is not impossible. You didn’t share exact numbers/balances with me, but I understand your current budget only allows for $400 to go towards repaying the credit cards (hopefully you’ll have even more once the mortgage is caught up).
Spread across 10 cards, that $400 budget only leaves $40 per card. You might consider a consolidation loan with Lending Club to reduce the number of accounts (and minimum payments) you are required to pay each month.
If you can successfully consolidate your accounts, but sure to close or tear up the cards of those that are paid off. Else you may revert back to old habits and begin using them again.
Sell Stuff to Raise Cash for an Emergency Fund
It would be great if you could build up a small emergency fund of a couple thousand dollars before starting your debt repayment plan. I worry the next emergency will lead you back to credit cards, and zap any progress you’ve made towards paying them off.
Do you have anything you could sell to fund this emergency fund? An extra vehicle? Old jewelry you no longer wear, but may have cash value? Appliances? Electronics? Consider hosting a yard sale or two. I’m not advocating you sell all the contents of your home, but this step will require an extreme measure or two to get an emergency fund in place.
The Debt Snowball
Here’s my advice for handling the remaining credit cards. Start with the traditional debt snowball. List your cards smallest to largest according to their current balance. The standard advice here is to pay the minimums on all accounts to keep them current, and pay anything extra on the smallest debt. In your situation, I’m not sure that’s possible, considering the sum of all minimum payments is likely much higher than $400.
I’d advise you to consider making a substantial payment – at least a couple hundred dollars – on the account with the lowest balance. Use any remaining funds to pay minimums on the next card or two. Hopefully, that card with the lowest balance can be paid off within a couple months, and when it is, walk that money right up the debt snowball to the account with the next lowest debt, and so on. The guys at the end of the list will probably be kicking and screaming for payments, but if you can’t get to them, you just can’t get to them.
Increase Your Income
While working this debt snowball, it would be great if you could find creative ways to increase your income. Perhaps you or your husband could work some overtime or a part-time job, or work from home in off hours. As you acknowledged, you are in a pretty big hole, so increasing the size of your shovel would certainly help get out of credit card debt that much faster!
I wish you and your husband the best on your journey to debt freedom. It will be a long road, but as someone who has just recently experienced debt freedom, I can tell you that every sacrifice is completely worth it!
Ask the Readers: Do you have any additional advice for Laura? Words of encouragement?