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CodeSlinger
2007-Aug-31, 06:17 PM
A question for the many wise minds here:

Due to some unfortunate past events, my fiancee and I have some sizeable credit card debts to deal with. We are trying to pay these off as much as possible as quickly as possible, to get ready for settling down and starting a family in the near future. There is one debt of $7500 and another of ~$20,000, both being charged 25%(!) interest at the moment.

We have roughly $20,000 in savings at our disposal. So one option is to use some/most of the savings to pay off a big chunk of the credit card debts. Also, I just went to my bank to see what loans we might get. The bank said that based on my income and credit history I can get a loan of $20,000 at 13.99% interest. So that's another option.

Are there other options we should look into? What combination of these options do you recommend for tackling our debts? Any general tips?

Click Ticker
2007-Aug-31, 06:36 PM
If you accumulated $20,000 in savings - I would assume your incomes are decent. Stop doing anything fun for about 6 months and attack the debt as is. Opening the smaller loan at 13.99% will just ding your credit for another inquiry and show yet another outstanding item. Use the $20,000 in savings, pay off the $20,000 note (okay - leave $1,000 in savings for a little emergency money), then drop as much as you can as quickly as you can on the $7,500 to get rid of it. You'll show two satisfied debts on your credit report rather than one satisfied and two outstanding.

Your credit score doesn't care what you have in savings and 25% is on $7,500 is far less than 25% on $7,500 plus 14% on $20,000. You could take the bank up on 13.99% on the $7,500 if there aren't any closing fees - but depending on where your personal credit score is - that extra inquiry and loan might hurt.

Once these are paid off - start building savings again.

Oh - and give this a shot:

http://www.willitblend.com/videos.aspx?type=safe&video=creditcards

CodeSlinger
2007-Aug-31, 06:49 PM
The bank called the loan a "credit line". Are there any differences between lines of credit and a loan? As far as I know there are no fees of any kind other than paying the borrowed amount back. The bank rep also said that having a line of credit doesn't negatively impact my credit score. Is this true?

Thanks for the video :)

Doodler
2007-Aug-31, 06:55 PM
Wipe the $7500, that's pretty much a no-brainer. One thing that credit bureaus like more than just a quickie payoff are payments. If you can make regular payments on the $20,000 monster, that will probably improve things more over the long term.

You're still eating your savings, at the same time, you're not wiping it out in one fell swoop.

Click Ticker
2007-Aug-31, 06:58 PM
The bank called the loan a "credit line". Are there any differences between lines of credit and a loan? As far as I know there are no fees of any kind other than paying the borrowed amount back. The bank rep also said that having a line of credit doesn't negatively impact my credit score. Is this true?

Thanks for the video :)

Having a line doesn't in and of itself negatively impact the score. What it does is tack on an additionaly inquiry, which depending on how many times in the past year you've applied for credit, can have a negative impact. Also, if you have several open revolving accounts (credit cards, lines of credit, etc.) - additional lines can hurt (particularly if you have high balances to limits - $27,500 in balances against $30,000 in limits would not be a positive).

Main difference between a line and a term note would be the amount of principal required with each minimum payment and the open ended nature of the line. If you pay the line down to zero - you've got $20,000 to do with as you please (of course paying interest against the outstanding balance). A term note paid to zero is satisfied and gone. You'd have to apply for a new loan to access to new cash once a term note is paid.

Some lines may require minimal return of principal with each payment, but many are interest only as a minimum. $20,000 term note over 5 years at a 13.99% rate would require a payment of $465.26 per month at minimum. You could do this on a line and pay it off in 5 years as well - but you'd have the flexibility of making a minimal payment if you have a tight month.

Doodler
2007-Aug-31, 06:58 PM
The bank called the loan a "credit line". Are there any differences between lines of credit and a loan? As far as I know there are no fees of any kind other than paying the borrowed amount back. The bank rep also said that having a line of credit doesn't negatively impact my credit score. Is this true?

Thanks for the video :)

Loans are lump sum handouts you pay back on a fixed schedule. You are literally handed $20k in some variation of cash or deposit, and you're on a fixed payment plan to return it. Lines of credit work like a revolving monthly credit card, with interest payments computed based on balance.

The difference between a credit card and a line of credit is that the credit card just screws up your credit history, where the bank will snag your collateral that you secure the line with AND screw up your credit history.

Click Ticker
2007-Aug-31, 07:07 PM
The difference between a credit card and a line of credit is that the credit card just screws up your credit history, where the bank will snag your collateral that you secure the line with AND screw up your credit history.

That's only if you don't pay it back. :)

SeanF
2007-Aug-31, 07:42 PM
Use the $20,000 in savings, pay off the $20,000 note (okay - leave $1,000 in savings for a little emergency money), then drop as much as you can as quickly as you can on the $7,500 to get rid of it.
I think I'm going to agree with Spock here with a couple caveats:

First, I'd leave something like $5K in the savings account for emergencies. $1K ain't worth much these days, if (God forbid) you should lose your job or something.

Second, I'd pay off the $7500 debt first. It'll get you one debt paid off right away.

But then, yes, put every single penny you can into that remaining debt. And cut out all unnecessary spending. A good idea for budgeting is to use an envelope system. For example, have an envelope for groceries. Put a certain amount of cash in the envelope each week, and buy all your groceries out of that cash. Simply do not buy anything on a credit card - use cahs, and budgeted cash, for everything.

My wife and I paid off about $40K in credit card/student loan/car loan debt in about 18 months' time a few years ago. I don't know what your income level is, but you can knock that debt down quick if you put your mind to it.

Click Ticker
2007-Aug-31, 07:50 PM
Someone's been listening to Dave Ramsey?

SeanF
2007-Aug-31, 09:03 PM
Someone's been listening to Dave Ramsey?
:D

CodeSlinger
2007-Sep-01, 02:08 AM
Happy news!

I had mistook a student loan for a credit card debt. We do have one credit card debt at $7500, but the second is only $6500, not $20,000! So what we will do is use our savings to get the two 25% monkeys off our backs once and for all. There will still be large student loans to deal with, but we were lucky, these loans were consolidated and locked in at interest rates lower than what our savings accounts have. So we can take our time in paying those off.

Thank you, everyone, for your fantastic financial tips. We will try hard to live by the provided guidelines. With any luck, we won't find ourselves in such dire financial straits again.

Donnie B.
2007-Sep-01, 01:37 PM
Sounds like a fantastic plan. Well done!

You didn't say how old you are, but based on your engaged status I'm going to guess mid- to late-twenties. That's great news, too, since you have a long time horizon to get that student-loan debt paid off. Just do the regular payments on that and you'll be golden. (Online banking can make that automatic and relatively painless).

My only other tip: make a budget and stick to it. Include savings in that budget, and consider it as important as your regular bills. Even if it's a small amount at first, it's critical to start saving early. If one or both of you has a job with a 401-K plan (assuming you're in the US), sign up for it!

When I bought my first house, the budget was tight -- to the point where I had to stop buying lunch and start brown-bagging. That little thing made all the difference, but I would never have realized it unless I'd done the budget.

mugaliens
2007-Sep-01, 01:44 PM
A question for the many wise minds here:

Due to some unfortunate past events, my fiancee and I have some sizeable credit card debts to deal with. We are trying to pay these off as much as possible as quickly as possible, to get ready for settling down and starting a family in the near future. There is one debt of $7500 and another of ~$20,000, both being charged 25%(!) interest at the moment.

We have roughly $20,000 in savings at our disposal. So one option is to use some/most of the savings to pay off a big chunk of the credit card debts. Also, I just went to my bank to see what loans we might get. The bank said that based on my income and credit history I can get a loan of $20,000 at 13.99% interest. So that's another option.

Are there other options we should look into? What combination of these options do you recommend for tackling our debts? Any general tips?

Convert your $20k at 25% to the loan for 14%. BEWARE the penalties for non-payment on a credit line, they can be huge.

But the key to getting out of debt is two-fold, and the NUMBER ONE KEY IS:

1. Spend less than 80% of your take-home pay. You'll have to compute that, and it's what you have left over after:

a. Taxes

b. Debt (of any kind, including mortgage, credit cards, money you borrowed from friends, etc.)

c. All normal living expenses (utilities, to/from work transportation costs, BASIC phone service, diapers, etc.).

2. If you can't do that, then it's time to reasses 1.c., get a better paying job, have the spouse work, downsize home and/or car, or move back in with the parents.

When I was in a crunch, I moved into a flat that costs 60% of what I was allotted (pocketing the rest), lived on potatos and a few other inexpensive, but healthy staples, went out once a month, checked out DVDs from the library, got rid of my car (cycled to work, getting healthy in the process), well, you get the idea.

What I had to do was simply say to myself, "change your life."

I did and managed to save a whole lot more than I thought I would.

But you have to be willing to let go of old behaviors that cost money.

Good luck!

CodeSlinger
2007-Sep-01, 01:49 PM
Thank you, Donnie B., for the compliment and the tips :) And that was a very astute guess! We are indeed in our late twenties, trying to get a better grip on our finances.

I'm in the US, and I did sign up for my employer's 401-K plan. My fiancee, however, is currently in Canada. What is the equivalent of a 401-K in Canada?

CodeSlinger
2007-Sep-01, 01:58 PM
Hello mugaliens,

It turned out that our credit card debts are less than what I thought they were (I had mistook a student loan for a credit card debt). We will be able to get rid of the 25% debts from our savings, without having to take out another loan or line of credit (whew). Thank you for your tips, I am adding them to the (long) list of guidelines to live by I am compiling from the info people have generously provided here.

Whirlpool
2007-Sep-01, 03:40 PM
Well..Congratulations CodeSlinger.

Just make sure that you wont overuse the credit cards again, because it'll just come back if you don't carefully use it.

Credit Cards are friends but they can be mean , pain in the butt if we don't use them properly .
Stick to your budget.

See to it that you know where your money goes once it leaves your pocket/wallet.

If there are available cash , use them instead of credit cards.

I usually use cash for regular errands such as groceries and paying rents, utilities. By that I can stick to my budget because I have alloted only what is needed in cash.

Use credit cards for occasions or emergencies if possible.
Because if you use it for groceries , it will only tempt you to buy things that is not in your grocery list...;).
Just as an example.

Anyway, happy living!

:)