Am I on the right track?

[Offshore82]

Hi everyone,

My wife and I currently have $23,000 in credit card debt, which is eating us alive. Most of this was racked up during our college years as my wife had to put herself through school on her own. We are now both 27.

I started tracking expenses 2 months ago, after all the monthly bills are paid we have $600 left over- or should. The problem is the $600 gets eaten up by clothing for our daughter, toys, vet bills, all the random things that just don't get on the monthly bill list.

I contacted a national bank and requested a $23,000 personal loan to pay the credit cards off. They would only do $15,000 which would pay off the largest credit card we have. The interest rate is 9.9% and would save us $50 a month- and be paid off in 5 years vs 85!

This leaves us with $8000 in debt.

I have 3 options here:

-Apply for another personal loan at a different bank (doubt they would give me one?)

-Ask for a loan from a family member.

-Ask my parents to take a home equity loan out for the full $23,000 and let us make the payments. I do not know if they would help us like this or not, their house is paid for and has been for awhile. The payment would be low enough that defaulting should not be a concern.

I also have $70,000 +/- in a 401K but have been told I can not take a loan out against it (due to program rules?). We are very responsible with our money, but can't seem to get these cards behind us.

My goal here is to just get all the debt off the cards and into something that is a low fixed rate.

Any thoughts out there?

[creditcardfree]

If you are currently adding money each month to your credit cards, then you are living above your means. Only getting control of your spending will leave you with the extra money to pay off the debts. Moving the money around does not pay it off.

I'm not saying don't take out the personal loan, but just make sure you have the finances under control so that you don't end up in the same situation 2-3 years from now. Take the fixed rate on the amount that the bank will allow. Put the extra $50 towards the credit card each month.

Do not ask to borrow the money from family. It changes the relationship you have with them. From family to borrow/lender. Don't do it.

It's also never a good idea to borrow from a retirement account. It's good that your plan doesn't allow this.

Are there things you spend money on that you can eliminate to free up cash to pay off your debt? Cancel cable, gym memberships, subscriptions, caller id, cell phones. Stop a bad habit: soda, alchohol, cigarettes. Look at EVERYTHING you spend money on and evaluate whether it has a bigger priority over paying off the debt. Is there something you can sell to bring in some cash...outgrown toys, clothes, electronics, extra furniture. Look around for things to sell and start listing them on ebay or craigslist.

[disneysteve]

Originally Posted by Offshore82

My wife and I currently have $23,000 in credit card debt

I contacted a national bank and requested a $23,000 personal loan to pay the credit cards off. They would only do $15,000

This leaves us with $8000 in debt.

NO. It doesn't. That leaves you with the same $23,000 in debt but instead of owing it all to credit card companies you owe some to the credit cards and some to the bank. It does nothing to reduce your debt. It just shuffles it around a bit.

You can not borrow your way out of debt. Not from a bank. Not from a family member. Not from a retirement plan. You just can not borrow your way out of debt.

The only two ways to get out of debt are 1) increase income and 2) decrease spending. Number 2 is generally the easier of the two to accomplish. You have at least $600/month going to "random things." That needs to stop. You and your wife need to sit down and go through the budget with a fine tooth comb and cut out all unnecessary spending - new clothing, toys, entertainment, cable tv, fancy phone service, gym membership, haircuts, charitable donations, dining out, etc. As for number 1, go through the house room by room and collect anything that you don't need and can sell either on ebay, craigslist or a yard sale. I've read that the average family can make at least $1,000 by doing that. I don't know how old your daughter is but sell all of her outgrown clothes and toys she no longer plays with and books that are below her reading level. Sell tools you never use, wedding gifts that have never come out of their boxes, unwanted holiday gifts that you never got around to returning. Anything and everything that you can live without needs to go. The other piece of number one is working more. Do both of you work now? Get second jobs. Turn a hobby into a business. Whatever it takes.

Don't forget to look at every possible expense. Get new quotes for auto, home and life insurance and see if you can get cheaper policies. Buy more store brand groceries and clip more coupons to cut the food budget. Be more mindful of your driving to conserve gas and make sure you know which stations in your area tend to have the lowest prices. Lots and lots of ways to trim spending that can all add up to big savings.

What shouldn't you do?

DO NOT borrow from family.
DO NOT borrow from retirement plans.

[Offshore82]

Originally Posted by disneysteve

NO. It doesn't. That leaves you with the same $23,000 in debt but instead of owing it all to credit card companies you owe some to the credit cards and some to the bank. It does nothing to reduce your debt. It just shuffles it around a bit.

.....

No kidding. Thanks for pointing out the obvious, it was a big help.

By the way- you can borrow your way out of debt if the terms and conditions change drastically.

The personal loan is paid for in 5 years, or I can pay for 85 years on the card at the same amount per month.

[maat55]

I hope you applied the loan money to the highest interest debts and not just the largest debt. You do not have to payoff one card, you could have just paid all you could to the highest amount of interest cards.

It is no excuse to say that other expenses just pop up. You control your spending. If you need clothes, go to Goodwill or garage sales. Get rid of the pet, etc.

You have to want to get out of debt more than anything else to do it quickly.

[Offshore82]

Get rid of the family pet?

Am I on the dave ramsey website?

My wife could earn a lot of money working the streets too but theres sensible and radical ways of doing things, I happen to prefer the sensible approach to life.

[GREENBACK]

Originally Posted by Offshore82

Get rid of the family pet?

Am I on the dave ramsey website?

My wife could earn a lot of money working the streets too but theres sensible and radical ways of doing things, I happen to prefer the sensible approach to life.

That line of thinking does touch a nerve with many. I would have to be extremely desperate to consider getting rid of my dogs. Simply eliminating debt isn't reason enough for me either. I've never had to consider this decision and hope I never have to. I've had dogs that have literally saved my life. How do you repay that? get rid of them for your stupid financial decisions!

[Offshore82]

Exactly!

[blankcheck]

Your initial question was "Am I on the right track?"

If you're referring to eliminating credit card debt: yes. Like you said, more of it would be a fixed rate bank loan, and the rest would still be credit card debt. If you are looking for comfort in this, good for you.

If you're talking about eliminating debt, PERIOD: not exactly. It's very common for people to consider the options you're mentioning (family, retirement plan, bank loan at a smaller fixed rate) and two of those are usually not recommended for reasons repeatedly mentioned on this forum.

So it sounds like your question was "What's the best way to transfer all of my debt to pay less interest and have someone set an aggressive pay-off plan?" So far (expectedly) the response has been "set your own aggressive pay-off plan and avoid the middle man altogether." If it being a bank gives you motivation via an external pressure, so be it; but it is not a requirement to pay credit cards off early, if that is your ultimate goal.

[JoshuaHeckathorn]

Keep the pet...it's good for family morale. You don't want depressed kids and an angry wife to deal with too.

The personal loan sounds like a decent option to get $15K on a fixed payment plan for 5 years. I do agree with the others - don't touch your retirement plans.

Also, borrowing from family is generally not a good idea, but that doesn't mean it can't work for some people. It really depends on the family dynamic, financial stability, and your ability to keep a promise. I don't think it should be 100% completely ruled out as an option. If Mom and Dad can pony up $8k that you can pay back over the next 2 years or so, so be it. You should be able to decrease expenses and allocate enough of your monthly income to make that happen.

There are still some 0% BT offers available these days too, so the balance transfer game could be an option for some of the debt if you have good credit. Factor the BT fees into your calculations and be extremely careful if you take this route. You'll need to devise a specific plan and really stick to your guns!

[skydivingchic]

Whether or not you are on the right track with the debt depends entirely on whether or not you have addressed the root cause of the debt. You say that you should have $600 left over each month, but it gets eaten up by random stuff. Vet bills are not random - they should be budgeted for. If you have had a pet for a while, you should have a reasonable idea how much you spend each year. Add it all up, divide by 12 and put that much aside each month whether you actually use it that month or not. Same goes for gifts, car maintenance, periodic expenses such as insurance, subscriptions, etc. Sit down with your wife and put together a reasonable budget which includes periodic expenses such as those outlined above. After you have done that, what is your left over or overspend each month?

Moving the debt to a lower rate, fixed interest loan could be a good idea assuming you have addressed the original overspending problem. If not, you will just end up a few years down the line with more debt on the credit cards PLUS the bank loan. Ask me how I know.

This is not the Dave Ramsey forum, though there are those here (maat probably one of the most vocal) who follow him. But maat has his reasons for supporting DR - namely that Dave's method helped maat on his journey. There are others of us who disagree (some very strongly) with much of what Dave has to say.

What has been suggested to you multiple times, but you seem to be ignoring are the other things to help you get out of debt. Sell anything and everything you can (I personally would never include my pets in that category). But I am hard pressed to believe that there is nothing you can sell - old books, out grown clothes, sports equipment, etc. Another thing you need to do when you do your budget, is eliminate everything possible. Others have given some ideas for that as well. Finally, you and/or your wife could get a second job to help out. These aren't fun ideas, but they will help. And keep in mind, these aren't forever - they are just until the debt is paid off and your spending is under control.

I will also reiterate what many have already said. DO NOT take money from your retirement accounts or borrow from family.

If you post a full budget, many here are great at going through and helping to find areas of potential savings.

[disneysteve]

Originally Posted by Offshore82

My goal here is to just get all the debt off the cards and into something that is a low fixed rate.

Any thoughts out there?

Ok. Let's just address what you state is your actual goal.

Is it better to have a fixed rate of 9.9% than a variable rate that is probably 18% or more (you didn't say what the rate is on the CCs)? Yes. Of course. A lower rate can make it easier and quicker for you to repay your debt assuming you've gotten your spending under control.

What to do with the remaining $8,000 of CC debt if you transfer $15,000 to the bank loan? Your first option, getting a second personal loan, would be perfectly fine if you could get another loan. I suspect you can't because if you qualified for more than $15,000, the first bank would be lending you more.

The other 2 options shouldn't be considered (borrowing from parents).

There is at least one other option you might consider: peer-to-peer lending. If you live in a state that allows Prosper.com or LendingClub.com to operate, you might be able to borrow money there.

All of that said, I still stand by my original reply in suggesting that this is a spending problem more than an interest rate problem. You need to free up as much income as you can to attack this debt. While moving the debt to lower interest rates is nice, it isn't what will fix the problem. Rather than your goal being to move the debt from one place to another, your goal should be to repay the debt as soon as possible. Even at 9.9%, you are losing a tremendous amount of money to interest payments.

I second what skydivingchic said. Post your budget, income and expenses, and lots of folks here will be happy to help point out places to cut back. Depending on how much you earn, 23K in debt should not be a huge burden to repay.

[Offshore82]

We gross $83,000 a year. Second jobs are not an option with a 2 year old in the house, and thats that. I will post the budget later tonight.

[minnie1928]

Just a quick comment about posting your budget...post what your net pay is in addition to gross. Taxes vary from state to state (county to county too), so also post what your actual take home pay is every month.

ps-I wouldn't get rid of the pet either. Although I would seriously look at my other spending to see what could be cut.

[disneysteve]

Just a comment on pets. I understand why that is a very touchy subject and I also wouldn't suggest that someone get rid of their pet unless they were truly in a crisis situation and needed every spare penny. What I will say though is that far, far too many people don't think about the financial expenses associated with having a pet before getting one. When the recession struck, there were numerous news stories about the shelters being overrun with abandoned animals that the owners could no longer afford to care for.

I think people need to sit down and run the numbers before making the move to get a pet. Can you afford it? Does it fit in the budget? Where will the money come from to feed and care for the animal?

OP, I'm not saying any of this applies to you. I was just putting it out there as a general comment.

[maat55]

Originally Posted by Offshore82

Get rid of the family pet?

Am I on the dave ramsey website?

My wife could earn a lot of money working the streets too but theres sensible and radical ways of doing things, I happen to prefer the sensible approach to life.

I know this sounds harsh and would always be an last resort. But getting out of debt and staying out of debt calls for sacrifice and mental conditioning. Pets can be an huge expense, so I use it as an extreme example.

BTW, getting rid of a pet does not mean euthanasia or dumping. Some people will spend thousands for healthcare while in extreme debt, these are those who do not need pets.

[BlackDiamond]

Yes, you are still $23,000 in debt.

No. YOU CAN NOT BORROW YOUR WAY OUT OF IT.

You can refi, balance transfer and get better rates, and that will prevent you from getting deeper than $23,000 more *in interest*, but the principle debt, $23,000 remains.

I personally have $12,500 on a personal loan. At the moment, that and a small car loan are my only debt. I recently took out a better interest rate loan to transfer it (smart move) but I still have $12,500 in personal loan debt. I felt horrible for having SO MUCH DEBT and so little cash in the bank (about $3000 cash) until I started reading these forums and talking to my friends about finances. Turns out, I'm doing way better than many people I know.

You want to hear about borrowing your way out of debt? I have a friend who has tried to borrow his way out of debt numerous times. He still has $18K in credit card debt, $20K in student loans, a $250K balance on his mortgage and $15K on a personal loan he borrowed to "get out of debt" 3 years ago. He also owes $5K to his mother, who bailed him out of the last personal loan. (She did that to help him get approved for the mortgage. Which clearly, he can't afford).

With a bankrupcy on his record, and a weak credit score (630 last time we pulled it---I try to help him by reviewing this stuff for him once in a while), he has realized that he can no longer borrow his way out. He can't keep shuffling things around to avoid facing reality. He has less than $1000 in the bank. He has withdrawn from his 401K more times than I can remember. He is probably more in debt now than he was when he took the first balance transfer loan… And now that it's harder to get credit, his plan to keep balance transferring has gone out the window. He can't get approved for things anymore.

You have $600 between two people left over after bills? That is not very much. If it was one person, I'd say that is good. But two people? Do you have an e-fund? If you do, than unexpected bills should not be a problem.

I have between $1000 - $1300 left over an I worry that I don't have enough. Once my loan is paid off, I will raise that $3K cash fund to as high as it can go. You need to increase your income. I make an extra $400 (average) per month selling my old stuff. Cds, DVDs, books, anything I have gathering dust.

I see nothing odd about the suggestion to give up your dog. As others have said, giving up a pet does not mean killing them or dumping them someplace. I gave up pets (guinea pigs) I couldn't afford when I had a ton of debt. I found them a lovely home where they actually receive far more attention than they did with me. (I get occasional updates and they are thriving).

I used to think giving up a pet was horrible but the reason I have most of the $12,500 in debt in the first place is because I wasted a ton of $$$ (upwards of $15K) on surgery for a dog that died anyway. If I had to do it over again, I would have just put him down. It was cruel to subject an animal to that much surgery, he suffered for at least a week before I put him down and I'm still paying it off, 4 years later. In the future, I'd skip expensive vet care and just say goodbye, let my pet pass with dignity and use the money to help a shelter.

As others have said, get your clothes from the goodwill. You and your wife certainly do not need new clothing. I understand that 2 year olds grow out of them fast, but she's 2 years old, she won't care if she has thrift store clothes. She won't know the difference. And sell her old clothes. People buy used baby clothes all the time.

Getting out of debt often takes painful sacrifice. I had $27,000 between loans and credit cards and I made some painful choices to get rid of it.

I gave up my wedding and FI & I are postponing it indefinately, until we are better off financially. We feel better knowing that we'll be better off when we start out. I gave up having children because I sat down and really thought about how much they would cost to give them a good life. I screwed up financially in my 20's really badly and now that I'm in my mid 30's and likely won't be married until I'm at least 40, I opted to obtain permanent birth control. IMO, It would be cruel to bring a child into my world with my current financial situation. I shake my head every day at people who have no money saved, tons of debt and who proceed to have multiple kids. I have to wonder what they were thinking.

On a less touchy note, I have also given up most of my personal belongings. Collectibles I spent years obtaining. Some that held sentimental value as well. I don't go out to dinners or for drinks with friends often. I don't buy new clothing…haven't in 2 years. I cut my own hair. It's turning grey and I opt not to dye it. I don't buy name brands at the grocery store.

I decided, getting out of debt was more important. In less than a year, I have gone from being $27,000 in debt between loans and credit cards, with ZERO in the bank, and maybe $300 left over after bills--- to having $12,500 in debt on a low interest personal loan, $3K in the bank and $1000 left over after bills each month. In the midst of all this, I even took a small vacation (paid for in cash) to remind myself of the things I can have when I have financial freedom. IT CAN BE DONE. I got a small raise at work, but the vast majority of this change came from changing my personal behavior and upping my income by selling things.

[BlackDiamond]

Originally Posted by disneysteve

Just a comment on pets. I understand why that is a very touchy subject and I also wouldn't suggest that someone get rid of their pet unless they were truly in a crisis situation and needed every spare penny. What I will say though is that far, far too many people don't think about the financial expenses associated with having a pet before getting one. When the recession struck, there were numerous news stories about the shelters being overrun with abandoned animals that the owners could no longer afford to care for.

I think people need to sit down and run the numbers before making the move to get a pet. Can you afford it? Does it fit in the budget? Where will the money come from to feed and care for the animal?

OP, I'm not saying any of this applies to you. I was just putting it out there as a general comment.

I feel the same way about kids. I have a friend who is single, has 3 kids and makes minimum wage. She is always crying poor. And I just sit there and wonder why she had 3 kids. Actually, she has 4 but she gave the 4th one up for adoption at birth. She is not a religious person who'd be against birth control, and birth control is not that complicated or expensive. I know so many people who have kids without having even $1000 in the bank. It's terrifying. I honestly do not understand why people have kids when they clearly can't afford them. It just continues the cycle of poverty. It's usually not just one "oops" baby either. The examples I know personally have multiples.

People just do not plan.

[BlackDiamond]

Originally Posted by Offshore82

We gross $83,000 a year. Second jobs are not an option with a 2 year old in the house, and thats that. I will post the budget later tonight.

I could see both of you not taking second jobs, but I see no reason why one of you couldn't.

[EEinNJ]

I'm sorry you're in this debt situation. Congratulations, though, on facing up to it. Fixing it will be a great life lesson, and if the debt was a byproduct of getting an education, it's still money well spent. The burden of the interest is the painful part, of course.

Since you're just starting with tracking expenses, it will be a few months before you get the full picture of what they are. Knowing and planning for what they are will help you avoid adding onto the debt. Not increasing it, especially if you take a loan, is very important.

Borrowing from family may be a bad idea, but if the grandparents like to buy things for the baby, or if they give you birthday or other gifts, you might suggest that they give you things you'd otherwise have to buy- or even gift cards?