Phil Mulkins: Tips for paying off holiday credit card bills
BY PHIL MULKINS World Action Line Editor
Wednesday, February 15, 2012
2/15/12 at 3:22 AM
Christmas is only 314 days away and maybe, if you play your cards just right, you'll have last Christmas paid off in time for the next Christmas charge-a-thon.
Last year's credit card bills have mostly all come in, and "ho, ho, ho" is now "Oh, oh, no!"
You'll have to come up with some basic luxury deletions to get a start on this debt, such as paring down to basic cable, bagging lunch instead of dining out and making your own coffee instead of buying the fancy stuff. Next you'll apply that extra cash to the credit card debt.
Debt-free calculator: Another strategy you can employ is using a "credit card debt calculator" to find out what you'll have to pay monthly to make it home by Christmas. CNN Money has a good one at tulsaworld.com/CCDebtCalculator - the "debt-reduction planner." It calculates how long it will take you to be debt free, based on your total balance, interest rates per card and minimum monthly payments. You key in the required information and select: minimum payments, fixed payments (over the minimums) or "debt-free in ... months."
You should pay more than the minimums and attack the balance with the highest interest rate first. After several months of sacrifice, the debt will be conquered and life can resume as before. Bankrate.com outlines the riskiest ways to pay it down.
Tapping nest egg: Never use retirement savings for credit card debt. It's too expensive. Raiding your future financial security - your 401(k) - can cost you a 10 percent "early distribution tax" if you have not reached 59 1/2 years of age, and the amount taken is added to your taxable income (with a few exceptions) See "401(k) rules" at tulsaworld.com/401(k)Rules
Instead, temporarily stop contributions to your retirement account and use the extra money to pay off your credit cards. The interest you're paying each month, as balances roll from one month to the next, is outpacing the returns you're earning from your monthly contributions. Be sure to restart contributing as soon as you're debt-free.
Rob rainy day fund: This is for true emergencies such as job loss - not for unsecured credit card debt. Losing your job is an emergency, as you still have monthly bills to pay. Draining the fund to get out of card debt exposes you and your family to real emergencies. You would be vulnerable for years, until you can replenish the fund. Real emergencies include medical issues, natural disasters, job loss (especially with unemployment lasting longer these days). If you must use those funds, don't wipe them out. Use small portions with other available cash as stopgaps for credit card debt.
Another loan: Avoid "payday loans." Title loans (loans against cars) are usually too expensive to pay, just for holiday shopping. Consider "signature loans" or "unsecured personal loans" from banks or a credit union, but only if you can qualify for them at reasonable rates and affordable minimums.
Signature rates are better than credit card rates. In Tulsa, you can get $250 to $5,000 for 18 months at 6 percent interest, while most credit card punishment rates are 22 percent. So, if your credit card debt is huge, a signature loan won't cover it all. You'll have to prove you have income to pay them off.
Don't risk your home just to pay credit card bills
More middle-income borrowers are seeking help through formal debt-reduction plans, according to the nonprofit credit counseling group CredAbility.org in Atlanta.
In 2007, its clients' average income upon entering its debt-management plans was $43,000, and their average credit card debt was $22,000. Last year, their average income was $54,000, and their average credit card debt was $24,000.
The housing debacle and continued high unemployment rates contributed to this, and the agency urges clients not to tap their home equity or discontinue paying mortgages just to get out of credit card debt.
Tapping home equity: Many homeowners have traditionally tapped home equity to help pay other debts (credit cards, etc.) says Bankrate.com. However, many homeowners don't have that option because home prices have fallen too much. One in five with mortgages owe more than their homes are worth, says a report on "negative equity" from CoreLogic, a property information and analytics provider. Another 23 percent owes at least 80 percent of their homes' value, making HELOC qualifying harder and riskier.
If you have equity, you don't want to push yourself too close to 100 percent loan-to-value, as this endangers your home. Taking out home equity is a dangerous move, especially as housing prices have yet to stabilize in many markets. Equity remaining in your house is your buffer against default and foreclosure - not for paying off second mortgages or credit cards.
Skip mortgage payment: Paying a credit card bill instead of the mortgage payment is a huge gamble and very unwise. This opens the door to foreclosure. Regrettably, such a strategy has become much more common in the last few years. An unprecedented drop in home prices has put more homeowners on the brink of losing their homes.
Many families are depending on credit cards as lifelines to buy the basics, making it important to them to keep their credit lines open, even if it means putting the house at risk.
Credit card issuers are quick to shut down delinquent credit lines because they are unsecured debt. The road to foreclosure is much longer, and many homeowners realize they could have as long as a year before they are evicted. Still, "the house" is most Americans' largest asset, so jeopardizing it to save a credit card should never be considered.
Original Print Headline: Paying away holiday bills
Tulsa World consumer writer Phil Mulkins wants to know which topics interest you. Call 918-699-8888, email your suggestion to phil.mulkins@tulsaworld.com or mail it to Tulsa World Consumer, P.O. Box 1770, Tulsa, OK 74102-1770.
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