Mailbag: Feeling Overwhelmed By Credit Card Debt?


Dipping into the mailbag today, I wanted to address some questions that seem pressing on many minds: sinking IRAs, too much debt and love and debt. A New England edition:

Carolyn in Massachusetts asks:I'm 20 years old and in January I put $2500 in a Roth IRA account. I know that with investing, you lose money along the way, but with the economy the way it is right now and the small amount of money in the account, would it be better to withdraw it and put it in a high-yield savings account until the economy takes an upturn and then put it back in the IRA?

It’s tempting to pull out of investments when you see your values shrinking but the great news for you Carolyn—and anyone else ready to pull the plug—is twofold: If you’re 20 years or more from retirement, you’ve got dollar-cost averaging and the overall growth of the market over time on your side. And second, consider yourself buying at discount right now—the long-time motto is: Buy low, sell high. And that’s exactly what you’re doing if you’re regularly (every month or twice a month) contributing to an IRA. Dollar-cost averaging refers to the exponential ability of money invested over time to grow like crazy—especially the more time there is before withdrawing. In your case, you’re way ahead of many folks your age and you should still keep socking away in that Roth. BUT please make sure that high-interest debt is out of the picture (credit cards) and check into your distribution on the account. Make sure you’re diversified and not too loaded in one sector, like only tech or only ‘growth’, etc.

Renee in Maine writes:I am drowning under $80K in credit card debt. I am paying all of my bills on time and my mortgage too. But I am getting to the point where I can't lower any of the balances. My husband is also taking a new job which pays $20K less a year. I know I won't be able to keep afloat then. Do I file for bankruptcy or call my credit cards and make a deal before I do? My 2 cars are paid off and I have no problem with my mortgage. HELP!

Renee—There are so many people in your position right now. But don’t look to bankruptcy yet. For you or anyone having trouble juggling debt on a limited or lower income, head to the National Federation For Credit Counselingto find a non-profit credit counselor who can sit with you and give you your personal options as well as—only if you need it—negotiate with your lenders and pull together a more manageable monthly payment plan. You’re in great shape in that you’re on top of your mortgage and don’t have car payments. Surely you have room to negotiate and make things better. Good luck! Keep me posted.

Kenya—Do not feel ashamed. And if you do, use it to only move yourself forward. Like I told Renee, above, head to the NFCC for a non-profit credit counselor. They will also be able to give you personal advice about your tax situation. But know that when you get married, your credit remains your credit. The only way you’ll affect your new spouse is if you’re buying something together like a home. In that case, your low credit score and history will bring his down but his good history and score (I’m assuming) will bring yours up. As long as you don’t sign up for any joint credit until yours is straightened out, don’t feel like this is what’s stopping you. Though it’s not a bad thing to want to get your money-life in order before making this move. It’s a good thing so if you do hold off, give yourself a time frame to look forward to. And keep him in the conversation—after all, you’re not only going to be partners in love, but partners in money. Wishing you the best…

Reading everyone's comments on this blog, you would think our government is just flush with extra cash to bail out foreclosures, reduce taxes, pay for this, pay for that. It would be wise if everyone would take a look at the national debt. It's 9.5 trillion and growing daily.

We have to borrow from other countries because we are spending way over our means. A large part of the national budget is allocated to pay the interest. When our lenders stop happily lending, we will have to increase interest rates dramatically. Even more of our national budget will go toward interest payments. This is a situation is not sustainable. --Ann, CO

Posted on: 10 Jul 2008 11:04 A.M.

Limit the usage of credit cards based on your monthly income. Make sure that you have taken a credit card with very low interest rate. Go only for a limited shopping with the credit cards. --Sam, India

Posted on: 10 Jul 2008 1:17 A.M.

I have to say, that on the subject of not taking money out of your 401k or IRA, I would have to strongly disagree with you and Suze Orman on that point. I understand that in the 401k situation, you would be taxed on that money twice....maybe, depending on your income level as a senior citizen and the tax rate at the time that you retire.

I believe that it is a better investment to take out the money from your 401k and put it towards credit cards that are charging you 28% interest, compounded monthly. Then, if you are late or over-the-limit, you can tack on an over-the-limit or late fee and then tack on interest on those fees. At least by using your 401k money, you are lowering your interest rate, it's like 4% above prime, and you're paying the interest to yourself which puts more money into your 401k and helps to offset some of the double-taxation. It will also free up your credit card debt and will give you a huge boost in your credit score...your cards are paid off so your debt ratio goes down....your 401k loan doesn't show up on your debt ratio calculation.

I will admit that there are 2 gotchyas. 1) This debt has to be paid or you run into a huge penalty. With credit cards, you can go into bankruptcy or get creditors to work with you. 2) You can't run up your credit cards again. --Rob, CA

Posted on: 09 Jul 2008 5:38 P.M.