“Dear Steve,
I am a divorced single mom of 2 pre-teens, work full-time, I am a homeowner and I have no savings. My problem is this: After paying for the mortgage, utilities, insurance and bills, I have very little left to live on. This has resulted in my using credit cards as a “back up” – and I need to stop the cycle now. I need to build savings for my family, not to mention college funds.
My take home income is $3400/month. I do have a 401K, but I am currently paying off 2 401K loans (1 to prevent foreclosure in 2005, and the other to pay attorneys fees for my divorce). One of the loans will be paid off in May 2010. Should I take out another 401K loan? The interest rate on the 401K loans are 5% for the first one, and 9% for the second one.
Here is my debt info: After my divorce, I purchased some new furniture on credit… I was not thinking straight! I spent too much. We did need the furniture, but didn’t need to get such high caliber and expense. This emotional purchase has strained me financially.
I didn’t pay off the balance in 1 year, so now pay 21.9%; current balance is $8743; minimum payments are $319/month. I am only able to pay the minimum. All other credit cards I pay more than the minumum, and I pay everything on time. I have an additional $15,000 in credit card debt; all credit cards are 18-21%; I have received opt-out letters for some and I am choosing to opt-out and close the accounts. My car balance is $21,505; half of which is negative equity from an upside down trade-in that occurred in 2005. I have good interest rates on my car note and my mortgage. My mortgage is $1200/month.
I have “good credit” – my former spouse and I did have a bankruptcy more than 7 years ago.
I read a posted article where you suggested the person try LendingClub.com for consolidating his debt at a lower interest rate – should I try that?
I need help figuring out how to have enough money left to live on after paying all the bills – without relying on credit cards as my back up.
Renee”
Dear Renee,
Well let’s get right to it then.
On the 401(k) Loans: Many people get the wrong impression that when you borrow from a 401(k) loan you are only paying back the loan at a low interest rate. That’s just not true. All of the money that was taken out is no longer earning a return so a 5% loan really winds up costing you 20% especially during these recent times when the stock market has been roaring back. 401(k) loans should be avoided.
On the Budget: We really can’t make a good budget without real data. I don’t give a damn how much you spend in each category. The goal needs to be that your expenses plus savings add up to less than you make. People that just sit down and make out a budget, blind, only create a page of lies. Instead, I want you to download a free copy of my book, “Eliminate Your Debt Like a Pro” and follow the process on how to create a spending plan based on how you actually spend your money. It starts on page 81.
On Closing Your Credit Cards: While opting out has some benefits, like keeping interest rates where they are now, it can also have some serious longterm credit score consequences. When you close your card you effectively guillotine your credit history, ending it when the card is closed. Your long track record on that card now longer will give you a continuing boost because the card is now closed. Best solution, pay the card off but don’t close your three oldest cards. You can heck which are the oldest and longest reporting by looking at your consolidated credit report.
On the Debt Consolidation Loan: If you have a credit score above 660 then LendingClub.com, the peer-to-peer lending network is something to investigate. Depending on your credit score you can get very low priced debt consolidation loans up to about $25,000. If you chose that route read my LendingClub page and find out how I will invest in your loan.
This solution might make sense, after you create your spending plan, check out the rates and terms available to you through LendingClub.com and then determine if the combination of these approaches gives you the breathing room you need. Go check all this out and create your spending plan based on real data and then come back and give me an update, please.
You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.
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