Stop the debt shuffle, and figure out why you owe so much
To Her Credit
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 writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com
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Dear To Her Credit,
Like so many people, we have card debt of approximately $55,000.
We also have a home equity loan of $31,000. I have no mortgage on my home. I have a $15,000 whole life insurance policy on my husband
that I was going to surrender for $11,000 and pay off some debt. I am now thinking
of taking a loan against it instead. I also want to try to get another home equity
loan to pay off the first one, which I can't draw on anymore. I would
appreciate your advice. -- Clarissa
You are right, many people have credit card debt these days.
However, $55,000 in card debt is more than a normal amount for most people.
That much debt could indicate a serious problem, especially since you
are talking about shuffling money around to try to cover it.
Before you try to pay off debt, you need to find out why you
have it in the first place. Some people get into debt during a period of
unemployment or illness. When their situations improve, they get rid of the
debt as quickly as possible.
Other people simply have more expenses than income. If they
are retired or close to retirement, they may have lots of debt and practically
no income. Borrowing from one account to pay another only delays the inevitable
day when they can't borrow anymore from anywhere. Sooner or later, they've
borrowed all they can.
Your best course of action depends on whether you fall into
the first group -- the people who ran up debt but will be able to pay it off in
a reasonable time -- or the second.
Assuming you and your husband still have good earnings
prospects for a substantial number of years to come, I recommend getting a new
home equity loan at a low interest rate to pay off the card debt. You should
only do this if you can avoid using the cards again -- otherwise, you'll be in
worse shape than before, with another home equity loan and new card debt.
Another option is to refinance your home and pay off all
your debts. The interest rate is bound to be lower than you are paying on the credit
cards. It's a shame to have to get a new mortgage on your home when it was paid
off, but the money on the cards has already been spent. Consider getting a
shorter-term mortgage. Very few people make more than the required
monthly payment on their mortgages, despite their best intentions. You don't
want to be paying off this debt for the next 30 years.
If you are near or at retirement age, you might consider a
reverse mortgage with enough cash at the beginning to pay your debts. Be aware
that, like any loan, a reverse mortgage costs money to set up. In addition, you
will have a mortgage on your home, which you may not want if you planned to
leave the home to your children. Either way, I suggest you talk to a trusted
financial adviser to explore all the options and ramifications of tapping the
equity in your home to get rid of your debt.
I'm glad you decided against cashing in your whole life
insurance policy. Surrendering a $15,000 policy for $11,000 would be giving up
25 percent of the value of the policy. Borrowing against the policy is probably
not your best move, either. You won't get enough cash to pay off your bills,
and then you'll have to pay interest on the amount you borrow.
If your prospects of being able to pay off your debts are
dim, you might consider settling your debts (negotiating with your card issuers
to pay less than what you owe) or even filing for bankruptcy. Either of these
options should be a last resort. They will hurt your credit score, and
therefore your ability to get more credit at a reasonable interest rate in the
With a serious level of debt and so many unknown variables, I
recommend that you find a nonprofit agency affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies to help you sort
it all out. They can help you review your options and compare the costs and
risks of each one. Your financial future
is at stake -- make sure you're solving your financial problems, not just pushing
them further into your future.
See related: Life insurance is for the living, not for credit card debt
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