What to do with $175,000 in credit card debt

Dear Liz: I have $175,000 in credit card debt. Almost all of this debt was due to balance transfer offers over the years which I managed quite well to make sure I had no balances with high interest rates. Now with credit being so tight, one of my issuers has reduced my credit limits and I can’t find any balance transfer offers to extend my low rates. Will the issuers allow me to settle this debt for less than I owe? I always get offers from credit consolidation companies that tell me banks are willing to accept 50% or less of your balance if you pay the reduced balance amount in full. Can I simply call up the credit card company and offer a reduced amount? If I cash out on my stocks and other investments, I could actually pay the debt off in full so I do have the ability to pay. I just never did so since the interest rates were so low.

Answer: The recession has made credit card issuers more willing to accept debt settlement offers, but your savings will come at your credit scores’ expense.

Card issuers really don’t like it when people don’t pay what they owe. When the notation of a debt settlement hits your credit reports, expect your scores to dive.

Some people have little choice but to accept this price. They can’t pay their debt and, for whatever reason, can’t wipe it out in bankruptcy court. In those cases, debt settlement can be the best of bad options.
You, however, have a choice. Don’t make one you’ll regret.

Adding fiance as “authorized user” may help his scores, but be careful

Dear Liz: My fiance and I are trying to secure financing for our first home, but his credit scores are just below the mark. I was thinking of adding his name to my credit card account so that my available credit line shows up on his report. Would this boost his scores at all? Is there any danger of it lowering his scores?

Answer: If you have a good history with this account — you always pay on time and you’re not carrying a large balance — adding him as an authorized user may help his scores.

The key is whether the credit card issuer will “export” this data from your credit file to his. Some issuers automatically do this export for any authorized user; others do so only for spouses. The only way to know for sure is to ask your credit card company.

If the data is exported to his file, it will be used to calculate his FICO scores, which are the scores most lenders use. The company that creates the FICO briefly toyed with the idea of excluding authorized user data in its latest formula, FICO 08, but ultimately decided to continue using it.

If you add him as an authorized user, you don’t need to give him a card or access to your account. What you should do, however, is take some time to go over his credit reports and discuss what steps he’s taking on his own to clean up his financial act.

A temporary boost in his scores might land you a mortgage, but you could wind up much worse off financially if he continues to mishandle his credit.

How to cope with credit card rate hikes

Dear Liz: I just received rate increases on two of my credit cards that are together going to send me into bankruptcy. I didn’t think it could happen to someone who has perfect credit, has not maxed out the card and has been steadily reducing the balance and not charging anything, but obviously it can. I had every intention of repaying my debt, but these arbitrary increases — which will add $600 a month to my payments — have made it impossible.

I feel foolish for having this debt at all, but I lost my mortgage business and my husband is in construction. We have had a really bad four years. If they had just allowed me to continue making the payments per our original agreement, I would have been able to continue reducing the balance and they would get their money. This way, they won’t receive any money at all. How does this make sense?

Answer: Credit card issuers know full well that their latest rate increases will send some of their borrowers to Bankruptcy Court. What they’re hoping is that they’ll get enough interest from those who can still pay to offset the losses from those that can’t.

All may not be lost. Many issuers who have instituted these rate hikes offer an “opt out” provision that would allow you to keep your original rate if you agree to close the account. You should contact your issuers to see if this option is available. Closing accounts can ding your credit scores but will cause far less damage than a bankruptcy.

Be realistic about your financial situation, however. The amount of the proposed payment increase indicates you’re carrying substantial debt on those cards. Unless your financial situation improves dramatically, it’s probably only a matter of time until a misstep or another change in terms causes you to fall behind.

If that’s the case, bankruptcy may be a better option than continuing to struggle with debt you’ll never repay.

For a budget that works, get control of your debt

Dear Liz: I am a single, 38-year-old mother of a college student and make about $80,000 a year, which isn’t too bad considering my upbringing. My parents were alcoholics, and thus I never had a financial role model. Now that I am making decent money, I need to know how to spend it appropriately. What I mean is that even though I bring home $4,000 a month, you would think that I make minimum wage if you saw my house and the way I live.

I think the problem is that I spend a lot of money on wasteful things such as eating out. I try to track my spending but don’t do it consistently. I would like to stop wasting money and buy a bigger, better home than my current town house. I spend $845 on my mortgage, including taxes and insurance, have two car payments totaling $700 plus $200 a month for insurance, utilities of $200, a home equity line of credit payment of $200 and a student loan payment of $200. I also have $4,000 in credit card debt. I contribute 6% to my company 401(k), which has a 3% match, but I don’t have an emergency fund. I know I should be paying myself first, but I don’t know how much. I’m just at a loss. Can you help?

Answer: First, give yourself credit for what you’re doing right. You bought an affordable home, you’re keeping up with the payments, and you’re saving for retirement.

Your big problem is your debt. Your car costs alone are high, given your income and other expenses. That $200 payment on an interest-only home equity line of credit indicates you’re carrying substantial debt there as well. And the proper amount of credit card debt is zero. All these indicate you’re living above your means, despite how you might feel.

If you want a budget that works, get your “must have” expenses down to 50% of your take-home pay. That includes your housing, transportation (including gas), utilities, food, insurance and minimum loan payments. Then you can devote 30% to “wants,” such as clothing, vacations, entertainment and dining out. The remaining 20% of your pay goes to savings and debt repayment, starting with that credit card debt. (Harvard bankruptcy expert Elizabeth Warren explains this budgeting system in her excellent book “All Your Worth.”)

Getting car debt under control can be difficult. Ideally, you’d sell the two cars and buy less expensive replacements with cash or by using four-year loans with lower payments. Often, though, people who owe this much on their cars are “upside down,” owing more than their cars are worth. When that’s the case, it’s best to “drive out of the loan” by continuing to make the payments until you’ve paid off the debt, then keeping the cars for several more years until you’ve saved up cash for their replacements. If possible, your college student should get a job and help contribute to the cost of her car.

Consistently tracking your expenses will help you identify areas of overspending and help you stay within your budget. If your current method isn’t working, consider using one of the online sites such as Mint.com or Quicken Online, which automatically gather and tally your bank and credit card transactions.

What to do when a mortgage modification stalls

Dear Liz: I have tried to work with my bank to modify my mortgage loan for the last six months. I send it every piece of paperwork it requests, but nothing is done. I bought my home for $280,000 and it’s now worth $110,000. My payments are very high and I’m getting depressed.

Answer: Contact a housing counselor approved by the U.S. Department of Housing and Urban Development. You can find links at www.hud.gov. This free counselor can review your situation and help you deal with your bank.

You may need to face the possibility that a loan modification may not help. Sometimes to create an affordable payment, lenders would have to reduce the amount you owe, which few are willing to do. Even if you do get a payment you can afford, you probably will owe more than your house is worth for many, many years to come.

To help you sort through these issues, read the Nolo book “The Foreclosure Survival Guide: Keep Your House or Walk Away With Money in Your Pocket” by attorney Stephen Elias.