Credit Card Debt

Dad is in debt
Dad is in debt

I’ve been off line from posting on Dad’s taxi for a few weeks as I was kind of depressed, but life must go on, so here we go again with my posts..

Today we are going to talk about the number one priority that is gnawing the inside of my brain.

I’m sure many readers are facing similar problems like this. This is drowning in credit card debt!

  • My number one priority for the remainder of the year is to dig out from continuous cycle of credit card debt that I find myself in. It’s not like we splurge on big ticket items that cause the balance to go up, but I’m trying to figure out the right balance between necessary expenses and the frivolous expenses.  As I pondered this situation, I’m reading some of the articles on how to tackle (my) credit card debt.

Here are some ideas that I have and some options.  I’m also looking at the article on Wisebread about Beer-Pong for credit card debts

  1. Dip into my HELOC and pay off everything in one shot – Good idea but fraught with dangers. If you do this once, now you build up your HELOC balance and pay interest there (tax deductible).  Over the past year, I’ve done this multiple times and I find myself having a balance that goes into 20k Plus.. Not a good trend… 😦 I find that I do this too much yet I think that this is the least of all evils. Summary: Possible, yet this solution is Evil without a doubt. You are just shifting bad debt to good debt. Not elimination of debt!
  2. Take a loan against my 401 K – Good idea, but you are still reducing your take home pay, as you you pay off the debt with pre-tax dollar. Also if you leave the company, immediate payback or pay penalties for early withdrawal. In this economy, regardless of how secure you think you are, you are just one downsizing from being on the unemployment line. Summary: Has positives and negatives. Negative far outweigh the positives. No go on this one.
  3. If you own stocks, take some profits/losses: For me, I do have a good portfolio of diversified stocks. Yet I seem to be going to this solution far too often. When will I just run out of Stocks to sell? Very likely scenario. Summary: Pay capital gains and/or take losses. Will extinguish your stock portfolio very quickly.
  4. Do the credit balance Shuffle – Every day I continue to get teaser emails (1.99%, 3.99%) saying how easy it is to transfer all my balances to one card for a 6 to 8 month low rate balance transfer. Of course, each of these balance transfer offers tell me what a great credit rating I have and how I’ve been “pre-approved”.  Don’t forget the 3% cost  against the balance for doing this. This solution is ok, but your credit score will get impacted as you increase the number of credit cards you have (total debt to credit ratio). Summary: Possible Solution, but will have to pay the balance transfer fees regardless of the length of low rate to the transferred card.
  5. credit_pieMake Minimum payments on Each Balance  and go after the lowest balance first and on and on: Pretty simple idea. Payoff the lowest balance first, while at the same time, making the minimum payments on all the other cards. Of course, the interest continues to accrue on the ones that you are not paying off. This idea to me sounds good, but fraught with dangers.  Which card to I use for non-discretionary expenses (gas, food, clothing, etc..). Summary:  I like this idea, but still is dangerous in the long term, as you will be paying large sums of interest on the cards that you are making the minimum payments on.. This will require lots of patience.

In my opinion, each of the ideas has it’s benefits and obvious flaws. Believe me, I’ve tried every one of the ideas above as well as combination. I’m actually thinking of going to strictly cash, but that’s another formula for disaster. You can easily run out of monthly and be living on savings when you do this. If you do this, how do you pay off your credit card debt?

My first step today is to use Suze Orman‘s Debt Eliminator  tool and see what suggestions that are presented there. I do know one thing, if I don’t address this situation soon, Dad’s taxi will truly become Dad driving a taxi to make ends meet.

  • After I keyed in my respective credit card balances she suggested that I go after the one with the highest minimum payment and interest rate first and pay whatever extra I can afford towards that balance. Once I pay off that card, go after the other cards.

I went to Clark Howard (a consumer advocate that I follow),  and he suggested the “laddering” method for credit card

  • This plan is identical to Suze Orman’s plan..

Of course I welcome any insights you may have.. TTYL

PS: found this wonderful article on Debit and credit cards on the NY Times site.