Rebuild credit, sleep better

Dear Credit Smart,
I have $16,000 in credit card debt, which I could pay off with my hard hit individual retirement account. I owed for serious medical debt. I will have no savings after this. I am working part time. I currently receive Social Security widower’s benefits of $1,375 per month. My job brings in $14,000 per year. I have a house payment of $1,050 per month, and a second mortgage of $20,000 at $196 per month. I was thinking I could start rebuilding savings and sleep better if that credit card debt is gone. I have a partner who helps with food and utilities. I am 65 and plan to receive about $500 more per month when I shift to my own Social Security at 66. Although I have some limitations, I feel fit and have an excellent attitude toward solving this. – Calvin

Dear Calvin,
I applaud your excellent attitude. From your question it appears that you plan to continue working part time, which I would recommend for as long as you are able. Your mortgage payments alone take most of your Social Security earnings; even without credit card debt and help from a partner with food and utilities you are looking at a fairly tight budget. The additional $500 will certainly help out, but you are correct in knowing that you are going to need to rebuild your savings. Life has a way of happening and too often those events come with a high price tag.

It is certainly true that looming credit card debt can cause stress that manifests itself in a variety of ways, and losing sleep is one of those ways. However, you should know that wiping out your entire savings could also cause you to lose sleep. I do understand that your IRA is not earning anywhere near the interest you are paying out on your credit cards, which is probably one reason you are considering this move.

I want you to know that there are other options available for addressing this debt. Two of those options are debt settlement and bankruptcy. Both of these options will have a negative effect on your credit score, in addition to other consequences that you might not want to deal with. From your question it seems that you have a sincere desire to pay your debt off in full and move forward.

A third option that would take care of that concern would be for you to seek the advice of a certified, nonprofit credit counselor such as those associated with my organization, the National Foundation for Credit Counseling. A counselor will review your entire financial situation and help you find the best solution. This initial consultation is always free. The counselors know the importance of emergency savings and will work with you to help rebuild if you decide to use some or all of your savings to pay off your debt.

Your counselor may also suggest a debt management plan, which would get your debt paid off in five years or less but at a fixed reduced interest rate. Your credit cards would be closed to further charges, which could cause a temporary drop in your credit score. However, 100 percent of your debt will be paid off on this type of plan. Making consistent on-time payments through a DMP will help correct this dip in score in time. If you choose to enroll in a DMP, you will likely be subject to a setup and monthly fee. However, these fees are generally minimal and less than what you will save in interest depending on your current interest rates. This solution would preserve the savings you have, even though you are not earning much on those IRA funds.

Remember to always use your credit smarts!

See related:Poll: Many lose sleep over financial worries