This & That: Debt Edition
Posted by Gail | Filed under This & That
On average I get about 200 questions a week from folks who need clarification on some money point (which I always answer) — 20 – 30 a week — and from folks who are desperate about their circumstances but are just throwing their problem at me and asking me to solve it (which I rarely answer) — all the rest. Sometimes I get a letter that warrants a kick in the pants. If you are assuming responsibility for your debt and just need to be pointed in the right direction, this is a good place to find what you need. I have all the time in the world for people who don’t know. I have no time for people who won’t do.
K wrote: We have $42,000.00 of debt that we are trying to pay off. We have a plan, thanks to your show, that should have it paid in three years. We are currently renting and we don’t know if we should use another $6000-$8000 on our line of credit to buy a house. If we bought the house we would be paying about $200 less a month than what we pay in rent. Is it crazy for us to go further in debt to buy a house, should we just keep renting until out debt is paid off?
I would not go further into debt until a healthy chunk of that $42K was gone. If you can’t afford to come up with a downpayment for a home, you probably can’t afford a home and the closing costs. While you may have calculated your carrying costs as less than rent, do they include everything, including maintenance? Read my stuff on buying a home before you jump in, please.
Desiree wrote: I have just purchased a new car, which is financed at 7% over 96 months. Crazy, I know, but hear me out! The payment itself is low enough each month that I can easily pay an extra $200.00 a month on top of the regular payment, and still have a life (I love the jars!). My question is how do I calculate how long it will take to pay out this loan completely? What trips me up is knowing that my regular payment (436/mo) is split between principle and interest, while my extra payments go directly to the principle. Any help is appreciated!
You don’t say how much you paid for the car, Desiree, so you’ll have to do the calculation. Here’s how:
1. Take the principal you paid for the car and multiply it by the interest rate percentage and then divide by 12 for the monthly interest cost (approx). So if you paid $30,000 for the car it would look like this: $30,000 x 7% / 12 = $175. That’s the interest cost.
2. Subtract the interest cost from your monthly payment. The rest goes to principal. Add that to the extra $200 a month you can pay.
3. Take the principal you paid for the car and divide by the number you came up with in step 2. That’s how long it’ll take to pay off the car in months.
Heather wrote: Hi Gail, I watch your show all the time. I am wanting to set up the jar system in my household. The one thing that I am curious about is the handy dandy budget binder. Is there somewhere on your website that you have a sample of that binder. I really think that once we get on the jar system and the binder that things are just going to fall into place. We took the first step to becoming debt free this summer, we like to camp and had a travel trailer that we decided to sell so that we could pay off some of our debt. It was a very hard decision to make but it has been worth it. If it weren’t for your show I don’t know where we would be right now. Looking forward to the budget binder sample. Keep up the great work.
Heather, congrats on the decision to become Debt Free Forever. It’s tough to take the first steps, but then things seem to move well, so stay focused and keep up the good work.
Make sure to read this: http://gailvazoxlade.com/blog/archives/110
Here’s info on the budget binder: http://www.gailvazoxlade.com/answers/answers15.htm?zoom_highlight=budget+binder
Ashley wrote: My husband and I have 2 credit cards and a line of credit. The line of credit has been paid down at this point enough to consolidate our 2 credit cards onto. My question for you is, should we consolidate everything together or continue to keep paying all 3 separate. I think we should consolidate thinking it may save on interest and such but my husband doesn’t see it that way….Please help.
Ashley, your strategy is dead right. Don’t fall into the trap of paying only the minimum on the line. Make sure you work out how much you need to pay to get to debt free in three years or less and then bust your butt to make it so.
Amanda wrote: My husband and I have a $235,000 mortgage and $17,000 in debt on a line of credit and less than $1000 in savings. We have two newer vehicles and a travel trailer that are all paid off. I am at home with our 2 kids (7 weeks and 18 months) and my husband works full time, shift work making $4,000 a month, net. If we keep going as we are now, our debt will be paid off in approx. 5 years. I am wondering if we should sell one of the vehicles and the trailer (we would loose quite a bit) to pay off the debt and purchase an older vehicle for my husband to get to and from work, or should we stay on the track we are on now.
Amanda, my first take is that you don’t have enough debt or a situation dire enough to justify dramatic steps. However, I wonder why you have $17K in debt — how have you been spending your money? And can you only come up with $400 a month to put toward your line of credit? I think you should focus on finding ways to come up with more to get that $17K paid off even faster, rather than looking to sell vehicles (for which the market will not pay well right now). That being said, if the $17K feels like a huge burden and you want to be free from it sooner, then selling one of the vehicles may be the ticket. I’m curious though, how come your husband — who is driving to and from work each day — is the guy who has to sell his newer car?
N wrote: i Gail, love the show, using the jars but have a major question! Should we sell our house? I know you take this seriously and I am getting conflicting advice on this. Our house is worth approx 1.2 million and we have 450,000 debt. 240,000 fixed mtg. 80,000 variable mtg (2.5%) and 130,000 credit line (home equity line), no credit card or car debt. I use the credit line like a bank account when I need it. I feel overwhelmed by the large debt. Our income is $200,000 which I know is good but we have 2 kids at university and life is expensive. Our property tax has just jumped which is killing us. We don’t have a lot left at the end of the month – we also own a cottage in Muskoka and have all those expenses – the actual cottage is paid for however. It would be nice to keep the house but it will take forever to pay off this debt and we are not saving. We are ready to downsize and this would get us out of debt and we could be really saving – we are 50 years old. What do you think?
N, you answered all your own questions. You said:
- I feel overwhelmed by the large debt.
- We are ready to downsize
- This would get us out of debt and we could be really saving
Just do what you know you need to do to fix the situation. You have the answers. Listen to yourself.
O wrote: i purchase a one bed room condo three years ago for $153,400.00 i have a first mortgage at 06.990% balance 114,319.11 i also have a second mortgage balance of $112,477.19 i do not have any credit card debt but i have a dept of $22,ooo my trust company is offering me a equity line visa which will be limited to a maximum of 75%of the value of the condo, i want to take it to do some up grading do you think it is a good move to make?
O, you don’t say how much you make and so it is impossible for me to calculate your debt service ratio and tell you if you can afford to take on more debt. I will say, however, that the fact that you needed a second mortgage likely means you are already carrying more debt than your first lender would let you take on. The idea of adding even more debt to this load should be very scary if, in fact, you’re already at the top of your ability to repay. Please think very carefully about this.
Natasha wrote: I have a question regarding my credit card limits. I have 3 credit cards, 2 that are 5 years old, and one I opened this year to make use of the ‘low balance transfer rate’. I have always paid on time, more than the minimums, and am finally close to being almost paid off. Recently, one older card increased my limit from $2500 to $7500 and the newest one has just upped my limit from $3000 to $4500. I now have over $14000 available in credit! I don’t need this at all, and I won’t use it, but I don’t know if I should call them and have them lowered to their original values (or less) or just leave them be. Will this hurt me if I want to buy a car/home in the next couple of years? I make $30000/year, and have a student loan of $20000. Thanks for your help!
Natasha, you should call and have them reduce your limits. You’re right when you say you don’t need access to all that credit. Congrats on getting so close to Debt Free Forever. Keep up the good work.
N wrote: I have two credit cards with Citibank and recently received notice that my interest will be going to 29.99% effective 11/29/09. Right now I have 9.9% and 11.25% on the cards. I have been a customer of Citibank for many years and an excellent customer at that, never late on payments, never gone over my credit limit. I can opt out by November 29th and continue to pay the balances off at my current interest rate but Citibank will close my accounts and report it to the credit bureaus “closed per customer request”. My question is: if I opt out and they close my accounts, how will this affect my credit, especially my FICO score? I would greatly appreciate your help. Not sure what to do.
Your bank is being a bully. It’s saying, “pay our exorbitant interest rates or watch your credit score go into the tank!” So much for being a good customer. I suggest you shop around and find another card to which you can transfer your current balances (or a line of credit if that’s an option). Then leave the accounts paid in full for about six months without using them while you build up your new credit history on your new card. Then blow your bank off!
Chris wrote: I am a long time fan of the show and I am hoping that you can provide me some insight. To make a long story short, my sister is going through a separation right now and she recently found out that her spouse had accumulated a large amount of debt before they where married. This debt is not in her name. There is also some concern that a large amount of debt may have been accumulated after they where married without her knowledge. This debt is also not in her name. In the event that a divorce is the end result to this relationship, is she responsible for this debt under Canadian law? Would debt responsibility change if an annulment was performed (vs. divorce)?
No one can be held accountable for debt they haven’t signed for. However, the assets of the person with the debt are attachable and that can be affected. In other words, if there is equity in a home, for example, that could be “attached” by a creditor trying to collect on a debt. But the debt itself is not attachable to a partner. Re the annulment thing, I doubt there would be any difference but check with a family court lawyer on that.
L wrote: My cousin dropped out of university a few years ago. Today, she is sitting on $20,000 worth of debt. She lives at home with her parents. She works in a Lululemon retail store, perhaps making $2,000 a month if she’s lucky with her full time hours. She wants to go back to school but everyone keeps telling her to pour all her money into her debt. This debt is two line of credits. She also has a bad shopping habit. She’ll put money into her debt but then spends it. She has no savings account and does not see the value in having a savings account. What advice can I give her to help her out so she can at least go back to school or perhaps rent a place of her own? What advice do you have for people in these positions who want to go back to school but sit on a large amount of debt with no savings? Please help me show her the value of managing money.
Your cousin’s debt isn’t the problem, it’s her spending. She could easily have wiped out that debt living at home over the pat few years. But she can’t stop shopping. Until she’s ready to change her life, there’s nothing you can do to help her. If her parents are allowing her to live rent free, they’re contributing to the problem. Sorry, but I don’t have any better news for you. You’ll have to wait until she’s serious. Then she can come on my site, find the tools she needs and take control of her money and her life. You can’t save her. Only she can save herself.
August 11, 2010 at 7:06 am
Gail, I just wanted to tell you that the one thing I enjoyed the most on the website is the “This & That” editions. Keep them comming !!!!
August 11, 2010 at 7:07 am
Hello Gail,
Desiree paid approximately $31,984.21 based on the loan formulas I found. She gave the monthly payment, interest rate and term, using that information the original amount can be calculated.
it was extra work.
regards,
Jason
August 11, 2010 at 8:35 am
I agree with Emiliano…the This and That Editions are the best!!!
August 11, 2010 at 9:16 am
Jason, do you use excel? If you type in =PV Excel gives you the rest of the formula to figure out the present value. The formula is =PV(rate,nper,pmt). Using 0.07/12 as the rate (for monthly interest rate), 96 as the number of periods, and $436 as the pmt, PV = $31,979.54. Interest calcs are compounded monthly, so could be a bit off for that, but Excel financial formulas are a great way to get quick pretty accurate answers.
August 11, 2010 at 9:22 am
So for the person Gail encouraged to reduce credit limits, is that just to remove temptation or is there another reason to do it? Because I have over $20,000 available credit (one LOC and 2 credit cards that if used are paid off every month). I don’t really have a purpose for all this credit — I have an emergency fund, and just save up whenever I want to buy something (even if it’s something big, like a car).
If I’m not tempted to spend on credit, do I need to or should I lower these limits? What would be the benefits/consequences of that? What are the benefits/consequences of keeping the accounts where they’re at? Is there a benefit to closing any of these accounts? (I would keep the CCs but I really never ever use the LOC).
August 11, 2010 at 9:24 am
Wow, Desiree’s car loan makes me feel much better — lol.
I think it was Gail that said you should never take a car loan for more than 3 years ~ if you have to, you can’t afford it. 8 years makes me cringe; doubt the payments would make much difference from 5 years, since so much would be going toward interest rather than principal.
My car loan is at 5 years, but I’m not in desperate straits to pay it off; it’s at 0% interest, thus no incentive, and it will be done in 2 1/2 years! My husband took out a 5 year loan for his… that’s a whole different can of worms; I hate that debt. I’m hoping to pay it off once mine is paid off, which would bring his car loan down to 3 1/2 years — never had 2 car loans before… Funnily enough, when we were younger, we thought we were too broke to have a car loan, so we always purchased our cars in cash (or, had them paid within a year)… Now we make more money, and look where we are!
Re: Amanda’s story…
I can’t imagine having a mortgage over $200 000, and having $17 000 in debt, with DH bringing home $4000 net… it doesn’t say how much she’s bringing in, but it sounds to me like they’re in a tight spot… Wonder what those mortgage payments are, and how long it’s amortorized (sp?) over.
August 11, 2010 at 9:28 am
I have a question about the response to N’s credit card situation. Is it better (credit score wise) to let a credit account sit empty for 6 months before closing it? Similar to what N was advised to do, I am planning on transferring the balance of my line of credit to another line of credit…in my case I already have an empty line of credit that is never used, but was obtained with our recent mortgage. I am going to transfer the balance that I am actively paying down to the empty LOC and then close the original LOC. From what was written, it seems like I should let the original LOC sit empty for 6 months before closing it. Will this benefit me?
August 11, 2010 at 9:28 am
@ B….
The incentive is that lenders look at how much credit you have available to you when you apply for a mortgage, and that can be a huge negative if you have the ability to go tens of thousands in debt, on top of the mortgage.
If you already have a mortgage, then you’re fine, but think of all that credit that would be available if your identity was stolen… that’s my bigger concern.
August 11, 2010 at 9:41 am
LOVE the This and That Editions, Gail! Keep ‘em coming!
August 11, 2010 at 10:03 am
Cas,
I definitely don’t have a mortgage yet =( I’m under 25 and still a student (I don’t know what the bank was thinking, to be honest, $20K is more than I make in a year). If I plan to buy a house in ~5 years, should I lower/close the LOC now?
My identity totally was stolen on Saturday too, and money was withdrawn from my checquing account!! They didn’t get the LOC but.. yeah, I never really thought how damaging that would have been if they were able to grab all my limits..
August 11, 2010 at 10:27 am
I got a broken link message “Error 404 – File Not Found : The requested URL /answers/answers15.htm?zoom_highlight=budget+binder does not exist” when I clicked on the link for the budget binder above, so I did a search and found it here (at least I think it is the same article).
http://www.gailvazoxlade.com/resources/the_budget_binder.html
I have reported it to the site webmaster as well.
August 11, 2010 at 10:57 am
for Desiree…Gail gave us a site a couple months ago that I love love love. It lets you plug in your loan information and then you can see how much faster you can pay things off when you pay more on the principal. Here is the link…
http://yourdough.com/tools/loan_accelerator
August 11, 2010 at 12:25 pm
Hi Gail,
I love reading this this & that editions!!!!
August 11, 2010 at 1:22 pm
sorry to intrude on the discussion….but I was wondering if some of the readers here could point me in the right direction.
I got a Home Depot credit card about 2 months ago, and cancelled it 2 weeks ago. I asked for them to send me a letter — they sent one with condolences on the cardholders (me) death. I laughed. I called and they said “oops, we sent out the wrong form letter”.
My question — when the account was closed, what is reported to the credit bureau? If it was said to be closed at consumers request, that’s fine. If it was said closed due to death (if such a term is used by the bureau), will that cause problems with my MasterCard (had for 20 years) or the joint VISA (I’m the co-applicant, hubby is primary, had for 15 years) or any other banking or future investments held in my name or in joint names?
August 11, 2010 at 1:30 pm
Jason…are you an accountant??? Maybe a CA or CGA working in public practice? Sorry, had to ask, my curiousity has been getting to me!!!
I really enjoy reading this blog and all the responders helpful insights on a daily basis, keep up the good work Gail and TDDUP followers!!!
August 11, 2010 at 2:07 pm
I really enjoy the “this or that” posts as well.
I must say that I do not like this new posting format requiring the character recognition. Twice I tried to post a comment on a previous subject and when I submitted it said it was wrong and I lost my whole comment.
August 11, 2010 at 2:08 pm
I just did it to me again!
August 11, 2010 at 2:10 pm
Kathy, I don’t believe that will have any impact on your other creditors. I recommend contacting Equifax and confirming with them.
Also, when the account was closed, it likely was not reported immediately so there may not even be a record of it at this time.
August 11, 2010 at 2:30 pm
“how come your husband — who is driving to and from work each day — is the guy who has to sell his newer car?”
That was my first question. You could also just sell one car, keep the other one to share between you if that’s feasible.
August 11, 2010 at 2:34 pm
Thank you jolie for your link. I just plugged my debt numbers in there based on my repayment plan and realised if I stay on track it will save me 7825.22 in INTERST! I only 13 000 to begin with! needless to say I am shocked, and I can’t think of anything more motivating then saving that money, I’m cheap and that number just will not do to pay out to some scummy CC company! So thanks!
Oh and Melaniesd if you press back when that message comes up you don’t loose your comment.
August 11, 2010 at 2:39 pm
Amanda..glad you enjoyed it. I found it very helpful in seeing how much I could knock off the loan with varying amounts of extra payments.
August 11, 2010 at 3:11 pm
@Meghan nope I’m not an accountant, I just looked up online and ran the numbers through the formula
@Mary, my number is a result of rounding. without knowing the final payment amount all numbers are approximate.
regards,
Jason
August 11, 2010 at 4:05 pm
My husband drive’s the junk car to and from work and I stay home with the better car. I would assume Amanda’s motives are like mine…my husband can fix the car if it breaks down or wait for a tow truck sans children. He uses it more and we don’t want the new one to accumulate too many kilometers. Plus I feel safer with the kids in the newer car, still need to go out every couple days and in case there is an emergency need a car out in the country.
August 11, 2010 at 4:43 pm
I also questioned why he would get the older car and her the new one but remember that when I was home on mat leave I got the new car so my hubby wouldn’t worry about me being stranded with an infant…also much less wear and tear…run the old one into the ground instead.
I have also gotten the message of wrongly inputted code, twice, before getting it to post…and I’m sure it was entered correctly. new web domain bugs???
August 11, 2010 at 5:17 pm
Completely off topic BUT I just finalized (by finalized I mean unless circumstances change) my debt repayment “budget” for the next year and found out something kind of fun. Turns out if I stay on this path I will be making my last and final payment exactly 1 week before my 27th birthday! TO make it even better, the last payment will be my student LOC that will be paid off 16 months early!! I think I may plan for a birthday/ I’m free party! A really, REALLY big one! One that I pay for in cash of course! Just thought I’d share, it’s very exciting to be 12 months away from being out of debt hell
August 11, 2010 at 10:01 pm
I often use online amortization calculators – they have features such as adding extra principal payments, etc. so a person can play around and see what extra amounts do to the loan term/interest. Even easier than excel (love excel, but not a fan of their interest calculators compared to the more interactive online calculators). That’s what I’d recommend to Desirae…
August 12, 2010 at 8:35 am
@ B:
I wouldn’t necessarily close your accounts (it is credit history which you should be able to use to your advantage), but I would suggest lowering the amount of credit available. It was a factor when we applied for a mortgage, many moons ago, and I think that banks are seriously looking at that factor again.
Was it Jason that said on another post that he would just bring to the bank and show them his paperwork to verify the activity on his account, and how much he uses it? At any rate, that would be more work on your part, and it’s hard to say whether the lending institution would take it into consideration or not; they have their own criteria ~ and yes, you could keep searching for a lending institution that would overlook that, but, in the end, I think it would just be easier to lower those limits now. If I was considering cancelling any cards, it would be store credit cards that have a very high interest rate ~ you’re not likely to be using them anyways, and you shouldn’t be.
Best of luck.
August 12, 2010 at 8:44 am
@B..the banks do indeed do look at how much available credit you have…that is taken into account when determining your debt service ratio so if you don’t use those huge limits get them decreased…I once left my purse in a shopping cart and didn’t notice until I was halfway home…all I could think about was the Visa card at zero balance with a 10k credit limit…some kind soul had turned my purse into the service desk so I really dodged a bullet there but the next day that credit limit was reduced to 2k…I will never charge 10k on my card so I just don’t need that kind of a limit…
August 15, 2010 at 6:12 am
Gee, Gail, I feel for you with all the emails you get. You’re a jewel to take so much time with all of them — and me.
Hugs from San Diego, California
Harry