Question:
Dear Steve,
I earned a pretty good living in the healthcare field and was paying my debt, saving and investing well until a family illness struck last July.
My Mom was hospitalized and sent to hospice due to heart failure. I took time off work to be the primary caregiver to care for my Mom. I took early social security at 62 not intending to make it a permanent retirement and was already receiving a military pension.
My plan was to work until at least 67 when I could tap into my fixed income annuity Roth IRA and be at full social security retirement age which for me is 66 and 6 months.
Obviously, this caught me unawares and I was not prepared financially to retire from a secure career at 62.
Fortunately, my home and car are paid for. I am intending to resume my career and work full time after my Mom passes on or at least work part-time up until the amount that I would be penalized by social security. Of course, with the coronavirus situation, who knows what the economy will look like in a few months.
I have about 21K in credit card debt. My options seem to be:
1.) A debt management service which will negotiate the balances down and get a lower interest rate on the remaining balance. They will want me to stop payment for 3 or 4 months because the credit card companies won’t negotiate until an account is in distress. There are commission and fees for their services plus temporary damage to my credit rating. Frankly, I don’t like how the debt relief companies operate.
2.) I could balance transfer the cards to 0% for 12 to 21 months with a 3 to 5% balance transfer fee. After the end of the zero-interest period, I could transfer to another card.
3.) I could get a personal loan to consolidate the debt, perhaps an interest rate in the mid 5’s to 7.
My question to you is: 1.) What is the best way to pay off this credit card debt without damaging my credit? Currently, I am paying about $745 per month and it is not making much impact on the principal but they are all current. 2.) Is there another alternative to my problem other than the three listed above? 3.) Is there a provision for hardship situations with credit card companies? 4.) Is there a lower interest rate available on personal loans that you know of?
David
Answer:
Dear David,
I’m so sorry to hear about your mother. Tragic and emotional times are ahead for sure.
If your credit is the most important thing to you emotionally, then making at least your regular monthly payments is the best way to knock out your debt. Pay it off faster if you can.
However, shooting for good credit and a dealing with your debt are two different things.
You used the phrase “debt management service” but what you were really describing was a debt settlement service. Debt settlement is a strategy for people in certain situations but it will lower your credit score if you default, you could be sued over the debt, and it can be reported on your credit report for seven years.
A debt consolidation loan is an option but a rate in the range you described is probably unlikely without some collateral. According to Lending Club, the average consolidation loan interest rate for those with great credit was around 12% for 36-month loans.
Credit card companies do have their own internal hardship programs and you are more than welcome to call your credit card companies and ask about them. However, don’t be surprised if they offer little since you are current on your accounts. But if you default to get access to hardship programs it will hurt your credit score. The good news is you can rebuild your credit again.
Now, you did mention that your home was paid for.
A home equity loan to pay off your other debt will probably be in the interest range you are looking at. See current rates here.
A downside to borrowing against the equity in your home is that if you fail to make the payments, you are pledging your home as collateral and you could lose the home if you default. The home equity loan would also likely improve your credit since the cards would be paid off.
But, don’t close the credit cards. You need to keep them open to boost your credit score for the length of open credit.
If you’d like to get a second opinion or sense-check my logic, talk to a debt coach like Damon Day or Michael Bovee.
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Options to deal with debt.
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