What is the Best Way to Eliminate My Credit Card Debt? – Anne

“Dear Steve,

I am a 39 year old woman who shares custody of my seven year old daughter. I got divorced a little over a year ago. I bought a townhome right after the divorce. I was lucky I bought when I did, because although I have excellent credit, I work as a bartender and I cannot prove my income, so I did a stated income loan and got a 30 year fixed at 6.375 in Aug of 2008. I doubt if I could get that today! It seems impossible to refi for a lower rate due to being unable to prove my income.

My biggest concern however is my credit card debt. I have one credit card, but the balance on it is $26000. I recently received a mass mailed pamphlet from my credit card company stating that due to the current economic crisis, my interest rate on the card would be increased from 5.99 to 14.99. I received my statement and my min payment went from $380 to $601.

There is no way I can make payments at that rate. I know I will have a mort until I am old and grey and I know I will usually have a car payment, and I’m ok with that. Getting rid of the credit card debt is my concern. I have considered three options.

One- If possible transfer balance to 0% card and every 12 months do it again,but I know there are fees associated with that .

Two- Try to refi house ( I put 20% down when I bought it) and roll the debt into it. At the rate I’m going it will take me 30 years to pay it off anyway.

Three-In the divorce I received $35000 from my ex husbands 401k. So I realize there is a 20% penalty, but take money from there to pay off the credit card. That is the only money I have though, and my bartending job obviously has no retirement plan. As I said, I have excellent credit and want to keep it that way. Also, my child support just got reduced by $200 a month and My best friend was living here but is moving in with her boyfriend in two weeks so my monthly income just got reduced by $550. I really need to eliminate that credit card debt. Any advice would be greatly appreciated.

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Given my financial circumstances, what is the best way to eliminate my credit card debt?


Dear Anne,

Great question and well thought out plan. Maybe these additional options will help.

First, a 401(k) loan is off the table. As long as that money is in a qualified retirement plan it is protected from your creditors and needs to be there to take care of you latter in life. Don’t touch it.

Second, the balance transfer route is a dead end. You never know if another creditor will offer a similar deal in the future. If you find a 12 month 0% offer you can best use that tool by paying off the full debt within 12 months. But what I’m seeing more of are people on 0% offers that then get their rate jacked up because the creditor claims a payment was late, even though it was mailed in plenty of time.

Third, you could try to refi the house but with the stated loan situation and the incredibly tight mortgage market right now, I think that will be tough or impossible.

So all of this leaves you with two realistic options. The first would be to enter a debt management program, and you can click the link to find one. Depending on who your creditor is, when you enroll in a debt management program the interest rate may be reduced, significantly. It’s worth contacting a debt management company and seeing what your creditor offers for people in a DMP. But in a debt management program, your monthly payment is not calculated on what you can afford, but what the creditor wants. In your case it will be somewhere between $380 and $601 a month. You won’t know until you check.

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

But, here is where I think we really are. Not only has your rate be jacked way up, but your income has been reduced by $750 a month at the same time. This means that moving forward your monthly liabilities have increased by the card and reduced income, or $971 per month. That’s a big hit.

I suspect that without increasing your income by at least the lost $750 a month that a debt management program is probably not going to work for you in the long run. If you default or fall behind in a debt management program you could get kicked out, the rates will skyrocket and you’ll still be left in debt.

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The most likely solution is going to be a Chapter 13 bankruptcy. Yes, it will hurt your credit, but so will a debt management plan. In a Chapter 13 bankruptcy you can keep your house and the payment to the creditor will be calculated based on what you can afford, not what the creditor wants. Additionally, at the end of the Chapter 13 payment plan the remaining debt not repaid will be forgiven, wiped out. Your credit can be rebuilt following a bankruptcy and you’ll have excellent credit again.

I completely hear you on the wish to keep your credit good but that wish is based on all the other factors in your life remaining the same, they haven’t.

Please update me on your progress by

P.S. Be sure to read ‘The Secret of Surviving Through Difficult Economic Times. What I Learned On My Journey‘.

Damon Day - Pro Debt Coach

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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