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.
Dear To Her Credit,
My husband and I are $42,000 in credit card debt, have a $29,000
car note and a $20,000 equity loan. Though our mortgage payment is relatively
low ($1,500 a month), we are sinking in debt and can barely keep up.
I want to sell my house (we wanted to buy a bigger home as
we've outgrown ours within a few years anyway) and pay off all of our debt with
the money we get out of the house -- hopefully about $70,000. I don't mind
selling the house because I don't like the neighborhood anyway, and I'd like to
get the kids out of here.
I should let you know we have VERY decent incomes ... we just
owe too much. I wanted to sell the house, pay off all of our debt and rent for
about a year. My rent will be about $1,700 a month -- a little more than our
current house payment, but we'll save all that interest on the other debt.
My current mortgage is at 6.5 percent, and my equity loan is
at 11 percent. My credit score is in the low 600s because of our high debt.
If my calculations are correct, I will direct deposit my
whole pay and live off of my husband's income. I figure in 12 months, I will
have at least $36,000 and will be able to look for a house in a neighborhood
that we prefer. My husband disagrees. He thinks we should refinance, but I
think that is just moving money around and also making it impossible to move
for many more years. I feel like I just want to start over. Is there a
professional I can talk to about this? -- Heidi
Dear Heidi,
The most important factor in your decision is that you
really don't want to live in your current neighborhood. We can make all kinds
of calculations and draw up a list with keep-the-house pros on one side of the
page, and sell-the-house cons on the other, but if you don't want to raise your
kids on this block, that outweighs all the other pros and cons.
I normally do not advise people to sell their homes to pay
off debt. Selling a home is incredibly expensive. You can easily spend 10
percent of the sales price on commissions, closings costs, fixing up expenses
and then you may get less from your home than you expected. Then you turn
around and pay closing costs on your next home. It's hard to make up for all those
expenses.
Plus, you're selling during one of the worst housing
depressions most of us can remember. That's fine if you turn around and buy
again. But if you sell now and wait a year or two to buy again, what happens if
the housing market picks up and prices start going up again? You could get left
behind.
If you were staying in your home, your husband's idea of refinancing would be sensible. If you had a higher credit score -- say over 700
-- you could refinance and save up to $500 per month at current low rates. With
a credit score of 600, you won't do quite so well. You could probably refinance
in the low 5 percent range with your credit score. You'd still save about $250
per month, but you would have to stay in your home about 13 months to break
even after refinancing costs. That straps you into staying longer in a house
you don't even like. Let's look for other options.
Here's one idea: Sell the car. You have a $29,000 car note. If
you're paying 10 percent interest, your payment is about $600 per month. It's
killing you. An expensive car also means higher insurance costs. You might be
surprised to find out how much you can save every month by replacing your car
with something much older. Ask your mechanic what kind of older car he
recommends -- mechanics have seen it all! Take that $600 you save every month
and start applying it to your credit card account with the highest interest
rate.
With no car note, your debt ratio and your credit score
should improve dramatically. If the debt ratio is the only thing holding your
score down, you should soon qualify for a much lower mortgage rate on the house
you want to buy.
Next, rustle up some cash by selling
things. You must have bought something to get $42,000 in credit card debt. If
you're like most of us recreational shoppers, a few things still have tags
attached. See if you can return them. Look for other things you can sell.
You're thinking about moving, so it's a great time to get rid of things. Apply
all the proceeds from the sales to your credit card debt.
If you and your family find other ways to cut expenses and
make more money, you can start knocking off that credit card debt faster than
you think. Talking to a professional is a great idea; I recommend a nonprofit
agency affiliated with the National Foundation for Credit
Counseling or the Association of Independent Consumer
Credit Counseling Agencies. Or, check out a financial course in your area, such
as a Dave Ramsey seminar. If Dave can't get a person motivated to become what
he calls a "gazelle" and get out of debt, no one can!
Once you get your credit score up into a better range, if
you really want to move, go ahead and do it while the interest rates and home
prices are low. You'll save money if you sell your house and buy another one
right away, instead of moving into a rental first and paying moving and sundry
expenses twice.
With your good incomes, there's nothing stopping you and
your husband from becoming debt free, moving up to a house you both like, and
reaching any other goals you choose. You can do it. Good luck!
Sally Herigstad answers questions about credit every week for CreditCards.com. Herigstad is a certified public accountant, author and speaker. She also writes regularly for MSN Money, Interest.com, Bankrate.com and RedPlum.com, and has been a guest on Martha Stewart radio and other programs. You can read more about personal finance and download free budgeting worksheets at her website: www.sallyherigstad.com
To Her Credit answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to Sally.
Published: October 21, 2011
Three most recent To Her Credit stories:
Should one spouse take on full debt load? – A married couple with joint card debt wants to transfer the balance to a lower rate card. Should the better credit score spouse take on the burden alone? ...
Can you use dad's credit card when he's ill? – An adult child is taking care of her dying father and wonders about the legality of using his plastic to pay for bills and medical expenses ...
Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!
