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

[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

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.