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There's no easy fix when you're maxed out on credit

If you hit your credit limit, chart a new spending path

By

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets.
Ask Sally a question, or read her previous answers in the To Her Credit archive
Question for the CreditCards.com expert

Dear To Her Credit,
I'm maxed out on my credit cards and barely getting by. My five-year ARM rate went down when it adjusted this month, but I'm worried it will go back up when it readjusts in March of 2011. Then we will be in trouble! My husband graduates from college in September of 2011, so we just need to make it until then.

Besides the adjustable rate mortgage, we have a HELOC and nine credit cards. Six of them are maxed out and the rest are almost maxed out. We live paycheck to paycheck. We don't splurge -- we just didn't do a good job managing the credit cards. Instead of paying them off, we kept charging everything on the cards. Of course, now we can't charge a penny as there is no credit available.

Our property value has gone down to less than half of what it was when we bought it in 2005 for $130,000. Homes exactly like ours are listed for $60,000. What should we do? Thank you. -- Tara

Answer for the CreditCards.com expert

Dear Tara,
Like many other college students, you maxed out loans and credit and did whatever it took to stay in school, believing that if you (or your husband) could just make it to the finish line, everything would be all right. It sounded like a good idea when everything was going well.

Now times are tough, and for too many people, it's not working out as planned.

Even if your ARM stays exactly the same next March when it readjusts, your financial position remains much too precarious. You've used up all your credit, which you've been depending on it to get by. I hate to think what the minimum payments on nine cards must be -- let alone the interest you're adding to your accounts every month.

In addition, if you and your husband are stretching your finances that far on the sprint to the graduation finish line, you could be setting yourselves up for a huge disappointment. I've seen top-notch graduates spend up to two years looking for jobs in their fields, and even then it takes a while to work up the pay scale to what they expected. What happens if you and your husband arrive at his graduation with no money, no available credit, massive monthly obligations and no job in his field for months or years?

Your husband might want to consider taking time off school to help catch up on bills. (Of course, you  have to make sure that works for his degree program and that it won't trigger the start of student loan payments.) In six months or a year, the two of you could make a big dent in your debt. Less debt equals less stress, which would be a huge help to him when he does go back to school.

If taking time off his degree program is impossible, some other drastic action is needed. One or both of you may need to moonlight or work more hours. You could move into one of your parents' homes or an inexpensive apartment and rent out your house. Perhaps a relative would lend you money to get you through the next year -- but that's a last resort! If you have cars, especially cars with payments, you could sell them. Live on campus or within walking distance to work. The occasional taxi is much cheaper than the total cost of owning a car. It wouldn't be easy, but it's been done.

If you need help looking at your options and getting debt under control, I'd encourage you to find a credit counselor at the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.

Although bankruptcy may start looking like an attractive option in times like these, I don't think it is right for you. Bankruptcy can help people who have one-time, extraordinary catastrophes, such as uninsured medical expenses or business failures. Bankruptcy would be a terrible way for you and your husband to start your post-college life together. By hurting your credit scores, it could even make it harder for your husband to get a job when he graduates. Try to find another solution.

As far as the ARM goes, the new FHA Program Adjustments to Support Refinancings for Underwater Homeowners may be just for you. This new program will help homeowners get into new FHA fixed-rate loans. If you qualify, your mortgage may be marked down by 10 percent or more. You must be current on your mortgage payments when you apply, and any loan forgiveness will be reflected as a negative item on your credit report. You do not have to be in an FHA-insured loan currently to qualify.

See related: 7 things not to do when you've maxed out your credit cards, 8 steps to picking a credit counselor, 5 tips for those considering bankruptcy

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Published: April 23, 2010


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