Daughter's Credit Card Debt

[groundloop]

My daughter just came to me seeking advice.

Her situation:

She has a teaching degree with 5 years of experience. A few years ago she had started a side business of online reselling that has really taken off to the point that she was making more at that than she was earning teaching. Earlier this year she quit teaching to work full time at her online reselling business.

She came to me last week and confided that she has $25,000 in credit card debt that she ran up over the course of several years taking trips and buying fancy things she didn't really need. Right now she's keeping up with her house payment, her car payment, and all of her other obligations, but only able to make the minimum payment on her credit cards which is around $500 per month.

I've explained to her about paying off the highest interest rate card first, and to her credit she has totally quit eating out and doing anything that wastes money.

I'm thinking that either a home equity loan or home equity line of credit are her best bet for getting out of debt the quickest. She estimates that her house is worth around $350K and she owes $270K right now.

Am I missing anything?

[UpInArms]

1. 3 years ago, my adopted daughter came to me with a similar problem

Hers was $10,000 in credit card debt but she had no assets and did have her job. I recommended that she go through a credit consolidation (reputable company) and look at their advice. They handled the credit consolidation and put her on a 3 year plan of paying it off. She is now debt free and is paying mortgage payments instead of rent. You might check it out.(she no longer uses any credit cards and lives within her means)

[Lonestarblue]

2. A home equity loan would certainly cost less interest if she has a good credit rating and can get one.

She might also check out small business loans if her business income is enough to support a loan.Those rates also would be lower than credit card interest rates. Good luck!

[Quakerfriend]

3. Home equity line of credit is one way to go but,

I would recommend she pick up some sub teaching or part-time, flexible on-line teaching.

OR rent a room out in her home, if possible.

[groundloop]

4. She's already put in the paperwork to substitute teach......

She figures she can do 2 days a week of substitute teaching while still doing everything she needs for her business.

[Quakerfriend]

5. Excellent! I hope she can pay it down quickly!!

Also, perhaps she can take a loan from a family member & pay them back with monthly installments?

[BobTheSubgenius]

6. A quick look at a credit app revealed that a $25K, 15 year fixed rate loan would cost about $250 a month.

If she has the discipline to keep making that $500 payment, she would pay out that debt in far less time. Typically, there is no prepayment penalty or limit on loans.

I think it's an excellent idea for her - keeping the caveat in mind. I know people who would go "Great! I've got all this headroom on my credit cards. Watch me go!" The worst offender in the bunch has so much debt that it's almost unfathomable. He lives in the cheapest rental he can find and drives a 17 year old Escalade, and lives by staying one step ahead of creditors and his debt that must be at least $300,000.

I have avoided debt my whole life, and have only ever paid interest on mortgages, and it's made my retirement possible. Not lucrative by ANY means, but I bring in almost enough to cover our monthly expenses, and have a bank balance that makes up the shortfall. As I told my now-wife, back when we were making plans "You're marrying the ant, not the grasshopper."

Her situation is somewhat dire, but totally recoverable. The very best of luck to you both!

[lastlib]

7. I do have a quibble with her paying off the highest-rate card first....

I think a better strategy is to pay down the debt that is costing her the most in interest each month. That way she is not accumulating more $$ going out for (as my grandfather put it) "buying a dead horse." It could be a lower-interest-rate card that has a higher balance because it's used more, due to the lower rate. But it would still be costing more in actual dollars. She will save money in the long run doing this.

[Happy Hoosier]

10. This is old now, but wanna hit this...

The highest interest rate is costing her more. That's the way iterest works. There are a variety of online apps that will demonstrate this. The Debt Avalanche method (pay highest rates first, regardless of balance) almost always pays off debt faster and saves the most in interest payments in comparison to the Debt Snowball method (pay the lowest balance first, regardless of rate). It's just math. The Debt Snowball has the psychological advantage of getting to the first paid-off debt first, which is why many advisors suggest it for people struggling with debt.

[A HERETIC I AM]

8. The first question I would ask is this;

After everything is paid, i/e., rent or mortgage, car, insurance, utilities (including phone and internet) and food, how much is left? If it is less than the minimum payment asked for on the credit card statement, then a couple of larger questions have to be asked;

How long do you want to carry this burden? What is the worst case scenario if you don't pay the credit card bill?

Answer: They wont put you in jail. We don't have debtors prison in this country (not yet, anyway). There are ways to avoid paying the debt but they aren't without consequence. If you ignore paying a large credit card debt, expect your credit rating to plummet. But that's not permanent. I speak from experience, having come from a rating in the low 400's to over 800 now.

It's risk vs. reward. I don't advocate shirking responsibility by any stretch, but at the end of the day, it is unsecured debt. The credit card companies know this, and as a result, they can go and pound sand.

If she defaults on the $25K balance, the absolute worst thing that can happen is it will be more expensive to get cheap credit for a few years. That's it.

[A HERETIC I AM]

9. And one other thing;

DO. NOT. UNDER. ANY. CIRCUMSTANCES. ATTACH A HOME MORTGAGE TO AN UNSECURED DEBT!

It makes no financial sense to offer up your home to secure a debt that is previously unsecured.

Fuck that shit. Let the credit card company eat it before they are allowed to get their claws on your house.

[Happy Hoosier]

11. This may be OBE, but...

Be careful of paying unsecured debt with secured debt! If she defaults on credit cards, it hurts her credit. If she defaults on a HELOC, she loses her house. Given she runs an unpredictable business, that's a real risk. If we have a economic crisis, her business could take a nosedive. It's risky. I'd persoanally NEVER use a HELOC for this kind of thing without a very secure job.