August 02, 2005
Tuesday

Dear Steve: I have five credit cards, with the following balances and (annual percentage) interest rates (APRs):

There's one card's $2,600 balance at 14.99 percent, and other card balances and rates at $1,200 balance at 7.9 percent, a $9,900 balance at 7.9 percent, a $1,400 balance at zero percent and $3,399 balance at 12.4 percent.

I haven't been late on any monthly payments for them, and I have fair credit. I am able to pay them - usually just the minimum payment, sometimes more. But I was wondering if a personal loan or a personal line of credit (not a homeowner) to pay off some or all of these would be better than keeping on making the smaller payments even if it is at a higher rate. What do you think?

- Robert

Dear Robert: I have a cousin who weighed a lot - maybe 400 pounds or so (who asks for details?). Anyway, he has tried a lot of ways to lose weight and finally found a plan that worked for him. He said he ate less. No hype, no program, no pills.

The reason I mention this is I think that you have a large credit-card debt and spending problem that you need to get under control. What you are asking is, "Would I be better off if my 400 pounds were concentrated in my rear end instead of my stomach?" It's still 400 pounds, and that is too much. Those cards have a total balance of $18,499. And, by the way, if your minimums haven't gone up yet, before the end of the year they will as a result of some government rules.

The first thing I would suggest is that you find out where your money is going and then seriously begin paying these cards down before the minimum payments increase. Depending on the card, that could be as early as October of this year. You should target those cards with the highest APR first and pay as much over the minimum as you possibly can, to get those balances down. Keep in mind you will still need to make, at the very least, the new and higher minimum payments on the other cards at the same time.

So where does the debt-reduction cash come from, you ask? The best way to find it is to carefully track your spending for a month or two and put together a budget or spending plan. Be especially mindful of eating out and those dollars spent on incidentals, like cups of coffee, movies, etc. These are the money gobblers that can sabotage even the tightest of budgets and (and) by tightening these areas you might find enough extra cash to more aggressively begin paying down these cards.

When you are at the point where less than 10 percent to 15 percent of your take-home pay is being used to pay the cards, then begin to pay yourself, via savings, so that you have an emergency fund. Six months' worth of reserves is ideal, and the longer the better, but even one month is better than nothing. Even at a month you can cover emergencies with cash, not credit. And by incorporating goals that you want to save for into your budget, you should be able to resist overspending and falling into the credit-card trap again. Good luck!

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