Could I Get Some Opinions? (Kinda Long)

iVillage Member
Registered: 08-13-2003
Could I Get Some Opinions? (Kinda Long)
6
Sun, 06-11-2006 - 10:44am

WARNING -- Long rambling post!! :-)

I've been going over our finances and trying to figure out the best way to start reducing our debt. As I've mentioned before, my hubby is only employed part-time at several jobs, and only one of these is "steady", in that I know how much he's going to bring home each month. He's looking hard for a full-time permanent position, but it's been 16 months and he's still not having any luck.

So, with an undependable income, we've run up our credit card from $300 to $5K in the last 3 months due to extensive dental and medical bills for the 3 of us, and yes, some stupid spending (but not too much!). We also have another credit card that we never use that is at a fixed rate (5.99%) and two mortgages. We took out the 2nd mortgage last year to reduce the interest rate on a couple of loans we had and yes, rolled a credit card balance into it, too (that one is closed).

We have a small (a little over $1K) emergency fund, but no other savings. Each month, I try to squeeze a little extra out wherever I can to try to pay towards debt. What I need opinions on is which debt I should be attacking. Here's how it lays out:

Credit Card 1 - $8700 at 5.99% (We pay $140 each month)
Credit Card 2 - $5300 at 13.99% (We pay at least the minimum - $122)
Second Mortgage - $20,000 at 9.375% (Min. payment - $218; I've paid $318 the last couple months)

Obviously my first instinct is to pay down the 2nd mortgage due to the high balance, but the 2nd cc has a higher interest rate. I hate-hate-HATE having a 2nd mortgage, but my dh thinks if we had to sell, we could cover the first and 2nd mortgage payoffs. I'm a little dubious about that, as the housing market here is in the toilet. But realistically, we're not going anywhere for at least 5 years, so maybe I should just pay the minimum on the 2nd??

And of course, we're not saving *anything* toward retirement ... but I can't see setting money aside to get a lower interest rate than what we're paying out, even taking compound interest into account.

Any opinions, thoughts and/or advice would be welcomed!!! TIA!! :-)

Amy

iVillage Member
Registered: 05-09-2005
Sun, 06-11-2006 - 3:48pm
Hi Amy,
My instinct would be to pay off the higher rate credit card -- it also happens to be the lowest balance credit card -- so you could celebrate getting rid of it before too very long.
Then I think I'd work on paying off the other credit card.
Your home will go back up again in 5 years -- besides, the interest is deductible, unlike the credit cards.
If you go to "calculators" at bankrate.com you can figure out how long it will take to pay off the 2 credit cards.
Good luck with all of this. It's always a more secure feeling I think when you can come up with a plan of attack and see results.
Megan
iVillage Member
Registered: 01-25-2006
Sun, 06-11-2006 - 4:56pm

Amy,
So sorry to hear about DH's underemployment. That is really very frustrating and it makes it so hard to make forward progress. Good for you for not throwing your hands up in despair.

Suggestion 1: Do you think you might be able to move the higher interest balance via balance transfer to the 5.99% card? Even with a $75 transfer fee, you would be money ahead if you could move it. It might also be worth it to open a new card with a 0% for a year offer if you think you'd qualify (sounds like you might). If you did that, you may want to move the 5.99% card too depending on what the interest rate will go to when the 0% expires. If it is in the ballpark of 5.99% fixed, I'd move it all.

Suggestion 2: Pound on the credit card debt (focusing on CC2 first if you don't do either of the above) and pay the min on the 2nd mortgage. I'm assuming that is a fixed rate loan and not an interest only HELOC. If it is an interest only HELOC, I might consider paying the min +3% of the balance so you are making some headway on it. My philosophy is you always clear non-deductible, non-secured debt before deductible, secured debt like a 2nd mortgage.

Suggestion 3: Do everything you can to stop the money bleeding by minding your budget very carefully and make on time payments no matter what. I think that in the circumstances, if you can avoid incurring more debt, that will be a victory in and of itself. If you can stop the increase and avoid any interest rate spikes/credit damage until he gets back to full employment, that will be a major win!

I agree to hold off on retirement savings for now but I might start that as soon as I finished the CC debt and before I cleared the 2nd mortgage. Again, could help for tax reasons and you can't ignore the compounding interest issue forever. You'd have to reevaluate where you are in terms of housing values, when you think you might be selling the house and what your retirement savings vehicles you have available at that time.

HTH!

Peg

iVillage Member
Registered: 08-13-2003
Sun, 06-11-2006 - 5:08pm

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Then I think I'd work on paying off the other credit card.

Your home will go back up again in 5 years -- besides, the interest is deductible, unlike the credit cards.>>

Thanks Megan! That makes good sense. And while we live on an unpaved street, the township plans to pave it next year, which will automatically add to the value of our home (yay!), so that reinforces your thought of the home going back up.

Thanks for your input -- I appreciate it! :-)

Amy

iVillage Member
Registered: 08-13-2003
Sun, 06-11-2006 - 5:43pm

Peg:

Thanks for all your insightful suggestions! :-)

I've always been nervous about trying to open another credit card, even one with 0% ... I always assume we'll get turned down. I don't know why -- we get pre-approved offers all the time ... I'll talk it over with dh. (The fixed 5.99 offer that we used on the one cc has expired ... now they're only offering the 5.99 'til next year.)

I also like your thoughts about secured vs. unsecured debt, even though I have this 2nd mortgage "stigma" in my head. What you're saying makes more sense. :-)

Thanks again -- I'm saving these posts and going to read them to dh tonight.

Amy

Avatar for endomagazine
iVillage Member
Registered: 11-09-2004
Sun, 06-11-2006 - 6:45pm

Hello Amy,


>Credit Card 1 - $8700 at 5.99% (We pay $140 each month)
>Credit Card 2 - $5300 at 13.99% (We pay at least the minimum - $122)
>Second Mortgage - $20,000 at 9.375% (Min. payment - $218; I've paid $318 the last couple months)


As previous posters have mentioned, your smallest credit card has the highest interest rate, so it's bleeding the most from your income in interest charges each month.


It's great that you have an emergency fund of $1000 ready for those unexpected payments. Congratulations!


Snowball everything extra you can to the $5300 credit card and pay the minimums on any other debt you currently have.


Then send the minimum from the $5300 credit card + the minimum from the $8700 credit card ($262 total) to the second credit card, along with any extra income.


At that point, when you pay off both credit cards, you'll have $140 + $122 + $218 (2nd mortgage minimum) = $480 to send each month to the second mortgage. You'll be *doubling* your second mortgage payment by sending the minimums you *used* to pay toward credit cards to your second mortgage.


Sincerely,
Lindsey Schocke

Geeks on Tap: Mission Accomplished

iVillage Member
Registered: 08-13-2003
Sun, 06-11-2006 - 9:24pm

Thanks Lindsey. I knew it would help me to get it "out there" and get some feedback from you all. :-) I appreciate your taking the time to help me think things out!

Amy