Debt!!!

[tigger03]

I'm trying to help a friend get out of debt. They involve a bunch of credit cards and a LOC. I've read posts here about consolidation loans, and several other threads about getting out of debt. Here's what I've come up with:

1. Don't go to a debt counselling/consolidating company -- it hurts your credit score.

2. Pay the minimum balance on all debt, and put more payment on your highest credit card by interest payment (i.e. pay the 18% card off first, then the 8%).

The debt is about 30k. This includes the MBNA 0% and CitiFinancial 0% cards which are almost due. The LOC is already maxed out. His FI denied him a consolidation loan.

I don't have all the specifics, but this is my game-plan ... and I'm open to any suggestions out there:

1. Sit down and figure out the cash-flow. Income vs. Expenses -- where are those paychecks going??
2. Ask for an increase on his LOC?
3. Pay the minimum balances on all debt, and put some more money on the higher debt.
4. If there's space on the lower credit cards, do a low % balance transfer.
5. After a card is paid off, cut it up.

... what do you guys think? I don't want to hurt his credit score, nor have him declare bankruptcy.


UPDATE: MARCH 31, 2009

We sat down and did the whole "budget" thing, and figured out where his paychecks were going. He called his cc companies, but they will not lower the interest rate. They said it would be better if he paid up and cancelled.

So what we're going to do are some low rate balance transfers and close up one or two of the high rate credit cards. By "close up" I mean paid in full and not to be used anymore. After that, it's just tackling the highest interest cc to the lowest while paying minimum balance on ALL cards (and LOC).

[BillyParadise]

Yep, that's pretty much it. Get rid of the highest rate ones first. Transfer as much to the lower rate cards / LOC as you can.

[beerbaron105]

Why don't you keep some of your cards for credit history? Exhibit some self-control and don't buy frivolous things, no need to cut them all up.

[bembem]

From a quick read, your buddy is in for a world of hurt.

There'll be a **** ton of interest from those 0% cards... and if his FI denied him, then there aren't many other options.

But beyond that, without any details and amounts, nobody can give any practical advice.

[PMREdmonton]

He should try to cut a deal with his CC companies for lower interest rates and in exchange he won't use them anymore. From their perspective, it is better than him defaulting on unsecured debt.

[tigger03]

He should try to cut a deal with his CC companies for lower interest rates and in exchange he won't use them anymore. From their perspective, it is better than him defaulting on unsecured debt.

would that go against him on his credit report?

I suggested cutting up the cards -- that way they'll still be on his credit history, and he won't use them.

[tigger03]

Why don't you keep some of your cards for credit history? Exhibit some self-control and don't buy frivolous things, no need to cut them all up.

That's exactly what I told him. The journey to get out of debt will involve a LOT of sacrifices, including not buying lunches, coffee, etc etc

[Impossibles]

How does going to credit counsellor hurt your credit rating? Isn't your score all based on your debt load and missed payments?

And by the sounds of it, your friend's credit score is about to get raped anyways.

[PrinceV]

First he must be willing to accept a life change in his views of money. Most of the time having CCs with high limit can tempt us to spend beyond our means, it's the way our consumer society does so, by bombarding us credit with perks or low interest.

Get him a book called "The Total Money Makeover" by David Ramsey. This is a life changing book for me and it will make him look at money in a different light. The book will be the greatest gift or advice you can give him.

Cut the CCs and ask the FI for a lower interest. Budget, Budget, Budget, by doing so he can find some extra money to pay off debt. The envelope system is great way to help you budget. For e.g. an envelope labelled for food is strictly used for only food. Any savings he has or any assets he can liquidate pay off the high interest CCs.

The one thing that the book has taught me is when you borrow money via LOC, CCs or loans we are slaves to the lender. This will always be the way I look at credit for the rest of my life.

I've been through the same situation as your friend, tell him there is a light at the end.

[DanielCarrera]

1. Don't go to a debt counselling/consolidating company -- it hurts your credit score.

1. I never heard such a thing.
2. Damn the score. Get out of debt!

If the company can really help you get out of debt, go for it. People pay too much attention to their credit score, and ironically, that causes them to make stupid money decisions which in turn worsen their credit score. Getting out of debt will do wonders for your credit score, so why don't you focus on that?



2. Pay the minimum balance on all debt, and put more payment on your highest credit card by interest payment (i.e. pay the 18% card off first, then the 8%).

Good. I will add (3) designate a total amount to pay every month to cover all debts. As one debts gets paid, shift all the payments to the next highest interest debt without decreasing the total amount that you pay. So the amount of money that goes to paying the next debt increases. This is the "snow ball" or "avalanche" method.



1. Sit down and figure out the cash-flow. Income vs. Expenses -- where are those paychecks going??

This is the single most important action. Bad money management is what led your friend to the current situation and only good money management can really get him out of it. If he doesn't acquire good money management skills, all your work will be for nothing because your friend will just get right back into debt.

If you get him a consolidation loan and he doesn't have developed money skills he might actually end up worse off. For many people who don't have money skills, whey they get a consolidation loan and see their payments go down and their credit cards clear, they go back into spending mode and end up with even more debt than before.



2. Ask for an increase on his LOC?

This is dangerous without proper money management skills.



3. Pay the minimum balances on all debt, and put some more money on the higher debt.

This is good. Not only is it mathematically efficient, but it teaches financial skills.


4. If there's space on the lower credit cards, do a low % balance transfer.

Only if you cut the old card.


5. After a card is paid off, cut it up.

No, cut it now. Why wait?

To be clear, by "cut" I literally mean, grab a pair of scissors and cut them in half. I don't mean "cancel".


I don't want to hurt his credit score, nor have him declare bankruptcy.

I have a very good credit score and I got it by never thinking about my credit score and instead focusing on getting rich. That led me to pay all my debts on time, and pay my debts as quickly as possible. This gives you a good credit score as a side-effect, but that's not why I did it.

Think about this for a minute: Why do you want a good credit score? So you can borrow money at a lower rate. But borrowing money is precisely the problem. Don't borrow! Save for the things you want. Don't get a car loan, buy the car with cash. The only loan anyone should have is a mortgage (and students may have a student loan). For a mortgage you should pay at least 20% in your downpayment, but aim for more.

[tigger03]

Thanks for all the suggestions.

PrinceV = thanks for the book suggestion. I have read the Wealthy Barbert by David Chilton, and I think it's a great book. I wouldn't mind reading more to expand my knowledge before I pass it on to him.

The reason I'm stressing on the credit score is b/c he and his gf and thinking about buying a house later this year, or early next year. I think they can put down only about 5% as downpayment. This is due to her saving more and him still trying to pay off his debts. He has never missed a payment, and always makes AT LEAST the minimum payment on each debt.

I realize paying off debt is most important. I've read some threads on RFD about the score getting hurt with debt consolidation companies, but as someone has suggested, a consolidation loan may not be the answer.

I'll keep the suggestions made on here in mind as I help him. Thanks, guys! Hopefully this thread will help someone else in a similar situation :o

[EugW]

I have a very good credit score and I got it by never thinking about my credit score and instead focusing on getting rich. That led me to pay all my debts on time, and pay my debts as quickly as possible. This gives you a good credit score as a side-effect, but that's not why I did it.
Funny you should say that. I damaged my credit score somewhat by focusing on getting rich. I was offered 15-20% off deals on stuff I needed anyway, if I only applied for a credit card with the store. So I did. Saved lots of bux on my necessary purchases, and then paid those credit cards off immediately and cancelled (and cut up) the cards.

That knocked my credit rating down a notch. It didn't take very long for the rating to go back up, but I'm just sayin'...



The reason I'm stressing on the credit score is b/c he and his gf and thinking about buying a house later this year, or early next year. I think they can put down only about 5% as downpayment. This is due to her saving more and him still trying to pay off his debts. He has never missed a payment, and always makes AT LEAST the minimum payment on each debt.
Somehow this entire paragraph just seems odd to me. He has totally messed up finances, yet he's thinking about buying a house? First things first. Worry about the finances now, and worry about the house when it's actually feasible.

[jiepie]

declare bankruptcy.

[gman]

Thanks for all the suggestions.

PrinceV = thanks for the book suggestion. I have read the Wealthy Barbert by David Chilton, and I think it's a great book. I wouldn't mind reading more to expand my knowledge before I pass it on to him.

The reason I'm stressing on the credit score is b/c he and his gf and thinking about buying a house later this year, or early next year. I think they can put down only about 5% as downpayment. This is due to her saving more and him still trying to pay off his debts. He has never missed a payment, and always makes AT LEAST the minimum payment on each debt.

I realize paying off debt is most important. I've read some threads on RFD about the score getting hurt with debt consolidation companies, but as someone has suggested, a consolidation loan may not be the answer.

I'll keep the suggestions made on here in mind as I help him. Thanks, guys! Hopefully this thread will help someone else in a similar situation :o

Buying a house? If he has problem paying the current debt, where will he find the money to pay even more debt (assuming the bank actually will give him a mortgage)? The advise you should give him is to forget about the house until his debt is under control.

[DanielCarrera]

That knocked my credit rating down a notch. It didn't take very long for the rating to go back up, but I'm just sayin'...

As you said, this was just a short-term effect.

[DanielCarrera]

The reason I'm stressing on the credit score is b/c he and his gf and thinking about buying a house later this year, or early next year. I think they can put down only about 5% as downpayment. This is due to her saving more and him still trying to pay off his debts. He has never missed a payment, and always makes AT LEAST the minimum payment on each debt.

<sarcasm>Yeah, I was just thinking "what this guy needs is another debt obligation"</sarcasm>

Seriously, something is wrong here. Your friend is struggling to pay his $30K and he wants to borrow an additional $100-200K to buy a house? This is wrong at so many levels...

1. If your friend doesn't have the money sense to manage a $30K, he should not be taking on a $200K debt.

2. The mortgage payments will severely limit his ability to pay back his large debts.

3. Buying a house with only 5% downpayment at a time when he is $30K in the red already, and they know that he is not good with money is just asking for trouble. This is an extremely risky proposal. He'll be more vulnerable to a rise in interest rates, loss of job, or any financial emergency.

4. His difficulty making the payments is bound to put significant stress in his relationship. Money problems are one of the top reasons for family arguments.

I believe that his plan to buy a house with a measly 5% downpayment is an example of the poor financial skills that led him into his $30K hole.

[PrinceV]

<sarcasm>Yeah, I was just thinking "what this guy needs is another debt obligation"</sarcasm>

Seriously, something is wrong here. Your friend is struggling to pay his $30K and he wants to borrow an additional $100-200K to buy a house? This is wrong at so many levels...

1. If your friend doesn't have the money sense to manage a $30K, he should not be taking on a $200K debt.

2. The mortgage payments will severely limit his ability to pay back his large debts.

3. Buying a house with only 5% downpayment at a time when he is $30K in the red already, and they know that he is not good with money is just asking for trouble. This is an extremely risky proposal. He'll be more vulnerable to a rise in interest rates, loss of job, or any financial emergency.

4. His difficulty making the payments is bound to put significant stress in his relationship. Money problems are one of the top reasons for family arguments.

I believe that his plan to buy a house with a measly 5% downpayment is an example of the poor financial skills that led him into his $30K hole.



I totally agree with this. A 5% downpayment is enough for a downpayment but you have to factor in moving cost.

Get rid of the debt and be debt free. As for buying a house with a gf, it's a bad idea. Be debt free, enjoy life by going on trips w/gf, get married and save for the house you want.

It's tempting to get into the real estate market...ONLY IF YOU HAVE THE MONEY. Don't get caught up with credit scores.

Check out this video

http://www.cbsnews.com/stories/2005/10/18/earlyshow/living/money/main951008.shtml

[tigger03]

Thanks for the advice, guys. Yes, I see the point in getting out of debt first, and then saving money to buy a house. I guess he got caught up to "keep up with the Joneses" ... lol ... but I'll try to help him get on the right track.

As they say, "You can lead a horse to water, but you cannot make him drink". I can only help him as much as he wants to be helped -- the rest is up to him.

[fantom]

Think about this for a minute: Why do you want a good credit score? So you can borrow money at a lower rate. But borrowing money is precisely the problem. Don't borrow! Save for the things you want. Don't get a car loan, buy the car with cash. The only loan anyone should have is a mortgage (and students may have a student loan). For a mortgage you should pay at least 20% in your downpayment, but aim for more.

As I keep busting your balls when it comes to investments and gold specifically, this on the other hand I can wholeheartedly agree on with you... people should bookmark that paragraph alone, print it out and stick it onto their bathroom mirrors, just to be reminded of it every day.



The reason I'm stressing on the credit score is b/c he and his gf and thinking about buying a house later this year, or early next year. I think they can put down only about 5% as downpayment. This is due to her saving more and him still trying to pay off his debts. He has never missed a payment, and always makes AT LEAST the minimum payment on each debt.

I can tell you right now that if he doesn't change his thinking about that house soon, he's fvcked. Royally. Especially if he doesn't manage to pay the measly $30K debt first and that interest starts eating his finances out...

What he should do instead is go find a cheap rental property, rent for a year or two until he has paid off his debt and saved some money that he can invest into a house... and then jump on the mortgage bandwagon if he is still into it, and still together with that girl. Otherwise, he's just asking for trouble...

Also, in regards to that 0% MBNA (and the other card too), tell him to call those up and ask them to extend that 0% offer for another year or two (as I've heard people do that)... and if not, ask them to give him a preferred rate on a card instead (they'll just switch him from that 0% offer to a 7.99% interest rate card or something) or else he'll just pay that off and cancel the card (it's in their interest to keep him around, so the power is sort of in his hands... sort of).

[tigger03]

Also, in regards to that 0% MBNA (and the other card too), tell him to call those up and ask them to extend that 0% offer for another year or two (as I've heard people do that)... and if not, ask them to give him a preferred rate on a card instead (they'll just switch him from that 0% offer to a 7.99% interest rate card or something) or else he'll just pay that off and cancel the card (it's in their interest to keep him around, so the power is sort of in his hands... sort of).

I'll tell him to give that a try ... it couldn't hurt ... thanks!! :D

[EugW]

Don't get caught up with credit scores.

Check out this video

http://www.cbsnews.com/stories/2005/10/18/earlyshow/living/money/main951008.shtml
Despite seemingly being an anti-FICO activist, even he admits that FICO scores are important in certain situations.

I agree one shouldn't get caught up with credit scores, but it's still quite useful to keep an eye on them.

[PMREdmonton]

Despite seemingly being an anti-FICO activist, even he admits that FICO scores are important in certain situations.

I agree one shouldn't get caught up with credit scores, but it's still quite useful to keep an eye on them.

The thing is that most higher income people commonly have some debt - car loans, student loans and mortgage loans. If you are going to take on debt, you need to handle debt responsibly and that is what a credit score will show.

For those of you who are wealthy and patient enough not to need any debt, more power to you.

BTW, as an aside note to credit scores, I was once labelled a high-risk individual for credit because of a simple misunderstanding which almost screwed up my ability to get a professional LOC. I had had a MC account that I was in the process of retiring as I had switched financial institutions. I bought a shirt in Dec 1997 from Eaton's as the last use of that card. I then moved in May 1998 to a new dwelling. Because of Eaton's issues at that time, they didin't bill me until June 1998 after I had moved. I didn't realize there was a problem until Oct 2008 when I ran into an old roommate who said I had some mail to pick up. When I went over and picked it up, I saw a lot of threatening letters from MC about the debt. I ran over to Bank of Montreal and paid off the debt + accumulated interest and thought that was the end of it. I was wrong as apparently they had forwarded the account over to a collection agency who I never heard from as I had paid off the account already. 3.5 years later when I went to switch over my student loans into a professional LOC there was a snag over the $60 shirt I purchased 3.5 years ago even though I had paid off the shirt and my credit record was otherwise absolutely perfect. After explaining the situation to Scotiabank and asking Bank of Montreal if they could forward a statement about my credit worthiness, the loan was approved in the end.

The moral of the story is occasionally bad things can happen to your credit history and you should get a credit report about once a year to ensure there have been no issues that have popped up.

[EugW]

The thing is that most higher income people commonly have some debt - car loans, student loans and mortgage loans. If you are going to take on debt, you need to handle debt responsibly and that is what a credit score will show.

For those of you who are wealthy and patient enough not to need any debt, more power to you.

BTW, as an aside note to credit scores, I was once labelled a high-risk individual for credit because of a simple misunderstanding which almost screwed up my ability to get a professional LOC. I had had a MC account that I was in the process of retiring as I had switched financial institutions. I bought a shirt in Dec 1997 from Eaton's as the last use of that card. I then moved in May 1998 to a new dwelling. Because of Eaton's issues at that time, they didin't bill me until June 1998 after I had moved. I didn't realize there was a problem until Oct 2008 when I ran into an old roommate who said I had some mail to pick up. When I went over and picked it up, I saw a lot of threatening letters from MC about the debt. I ran over to Bank of Montreal and paid off the debt + accumulated interest and thought that was the end of it. I was wrong as apparently they had forwarded the account over to a collection agency who I never heard from as I had paid off the account already. 3.5 years later when I went to switch over my student loans into a professional LOC there was a snag over the $60 shirt I purchased 3.5 years ago even though I had paid off the shirt and my credit record was otherwise absolutely perfect. After explaining the situation to Scotiabank and asking Bank of Montreal if they could forward a statement about my credit worthiness, the loan was approved in the end.

The moral of the story is occasionally bad things can happen to your credit history and you should get a credit report about once a year to ensure there have been no issues that have popped up.
Yep, exactly. A very similar thing happened to someone I know. That person closed off a card, paid off all the bills and then moved... Except there was one purchase <$200 that was missed. That remained on the account for years until the credit was checked.

The good news is that you can check for that for free, without having to look up the actual score. (Getting the score costs money.)

I do this once a year with both Transunion and Equifax. Costs nothing. However, I also check my scores periodically, albeit less often. ie. Averaging it out, it costs me less than $15 per year to keep an eye on my credit record and credit score.

[EugW]

http://www.cbsnews.com/stories/2005/...in951008.shtml

Sorry for threadjacking, but I just don't understand how Ramsey comes to the conclusion that a person has to carry debt in order to get a high credit score.
I wondered the same thing. Just because you have a credit card doesn't mean you have to carry a balance on it. Or does that 2-3 week grace period count as "carrying debt"?

It's true that a lot of people have far too much debt and aren't responsible managers of their own finances, but this guy seems to be beating that anti-FICO drum a little too hard IMO.

[VivienM]

I wondered the same thing. Just because you have a credit card doesn't mean you have to carry a balance on it. Or does that 2-3 week grace period count as "carrying debt"?

Yes, it does. When the credit card company reports to the credit bureau, it reports the amount in the "New Balance" box on your statement.

It DOESN'T report how much of that balance is new since the last statement...

[VivienM]

http://www.cbsnews.com/stories/2005/...in951008.shtml

Sorry for threadjacking, but I just don't understand how Ramsey comes to the conclusion that a person has to carry debt in order to get a high credit score.

He's defining debt broadly to include unused accounts (credit cards, LOCs, etc)

To have a high credit score, you need a solid repayment history, low utilization, etc. If you have no accounts reporting to the credit bureau... how do you accumulate these things?

[i6s1]

Bankruptcy is the last option.

Without knowing how much the person can pay towards the debt, it's impossible to tell if it's better to to go credit counseling or to DIY.

If a person makes $100k and is $30k in the hole, they can probably pay it off within a year, so they should preserve their credit score.

If a person makes $20k, it will take them longer to pay off the debt then it will take for their score to recover. They should go to counseling.

He needs to call his credit card companies and ask to pay for a lower interest rate.

[PrinceV]

http://www.cbsnews.com/stories/2005/...in951008.shtml

Sorry for threadjacking, but I just don't understand how Ramsey comes to the conclusion that a person has to carry debt in order to get a high credit score.


Ramsey is basically saying don't get caught up with Fico scores, since these scores are based on how much debt you have and the trustworthiness of you paying it back.

Fico scores aren't good indicators of a person's wealth.

I could be debt free have a million dollars in the bank and have a crappy fico score or have a fico score of 800 and be debt of $100,000. Which would I rather have? I like the debt free and the million dollars in the bank idea.

[VivienM]

I could be debt free have a million dollars in the bank and have a crappy fico score or have a fico score of 800 and be debt of $100,000. Which would I rather have? I like the debt free and the million dollars in the bank idea.

But if you have a million dollars in the bank, you should just have some nice, high-rewards credit card that lets you have the 800 FICO score... and contributes to making you slightly richer when you buy stuff.

[PrinceV]

But if you have a million dollars in the bank, you should just have some nice, high-rewards credit card that lets you have the 800 FICO score... and contributes to making you slightly richer when you buy stuff.

When you are rich a 800 Fico score doesn't mean anything to you. Warren Buffet said his fico score was only 718.

[i6s1]

When you are rich a 800 Fico score doesn't mean anything to you. Warren Buffet said his fico score was only 718.

Wow, that's exactly my score.

[coolspot]

The reason I'm stressing on the credit score is b/c he and his gf and thinking about buying a house later this year, or early next year.

Something is wrong with this picture. Why are you stressing?

[Jacklad]

Something is wrong with this picture. Why are you stressing?

He means "stressing" as in "emphasizing", not as in "being stressed about".

[tigger03]

well, here's an update.

We sat down and did the whole "budget" thing, and figured out where his paychecks were going. He called his cc companies, but they will not lower the interest rate. They said it would be better if he paid up and cancelled.

So what we're going to do are some low rate balance transfers and close up one or two of the high rate credit cards. By "close up" I mean paid in full and not to be used anymore. After that, it's just tackling the highest interest cc to the lowest while paying minimum balance on ALL cards (and LOC).