My wife and I are finding it increasingly difficult to keep our debts under control, particularly the credit card debt. I owe about €7,000 while my wife is about €4,000 in the red. We have already topped up our mortgage in the past to pay off these debts and now we find ourselves back in the same position. I have to keep mine for work purposes, however my wife has agreed to cut her card up. Although this will help in the future, it does not provide a means of paying off the existing high interest debt.
The good news is that there is light at the end of the tunnel. This problem can be easily remedied by putting yourselves on a strict budget. The bad news is that you will have to put yourselves on a strict budget. Not using your cards any more is the first step towards paying them off. Most people who are in credit card difficulty use their cards to the limit of their credit, pay the minimum each month, and then spend up to the limit again until they get their next bill.
The first step is to cut up your wife's credit card as she suggested. If you must keep your one, use it only in the knowledge that when the bill comes in thirty days later, you will have sufficient funds to pay the bill in its entirety. Credit cards lull us into a false sense of security that does not exist with cash. We believe that we have a limitless supply of funds when the nub of the matter is that we are racking up a hefty interest rate bill. I use a credit card like a charge card utilising the thirty plus days credit but paying the bill in full each month. If you are only paying the minimum each month, it will take you eleven years to clear the debt.
You and your wife should start using your Laser whenever you need to purchase something and you do not have cash. A debit card allows you all the convenience of a credit card, with all the limits of your own bank balance. It's an excellent substitute but be careful in case you are embarrassed with a rejection at your local supermarket because of a shortfall in your bank balance.
The next step is to impose a strict budget on your household. As a couple, you should not spend money on anything that is not essential. This means no new clothes, no home decorating and no dinner out unless you have the money outside the budget i.e., if you have saved for this specifically and separate to the budget. When cabin fever sits in, why not visit a friend's house or a trip to the cinema budgeted of course.
After you stop spending, you need to start paying. When your credit card bill arrives in the post, pay off as much as you can afford. If you find yourself with a little surplus cash a while later, send that money to the credit card company even if it is not bill time. Those with an online banking facility can do this at the mere press of a button so there is no excuse. Remember you are saving high interest charges.
Lastly, beware of topping up your mortgage once again. As tempting as it may be, home equity loans are expensive in the long run. Debtors are lured in by the attraction of lower repayments and they don't always notice that the reason the repayments are so much lower is because the term is usually significantly longer, sometimes the lifetime of the mortgage. This means that they end up paying out far more than they would have done for a few short-term loans. For example, a person with a €7,000 three-year fixed loan with a rate of 8.4% pays back about €221 per month. Over the lifetime of the loan, this will add up to €7,943 in total.
On the other hand, a person who chooses to top up a mortgage with a loan of €7,000 and a rate of 4.75% - and believe it or not, there ARE cheaper rates out there at the moment even in these turbulent times will pay € 27.70 per month (interest only) in addition to their mortgage payment. The real trick would be to pay off the amount owed over the same period if at all possible. Over twenty years they will make interest repayments of €6,648 while the €7,000 capital will still be outstanding. However, that € 7,000 loan might be ultra important, second level education and coming perhaps at a time when a "bit of a dig out" is required now there may be income streams from a variety of sources but not for ten years and therefore monthly outlay may be more important than long term objectives ( € 221 versus € 27.70 per month )
Obtain good advice and see all sides to the options available. I do believe in releasing equity from property for investment purposes but not lifestyle purposes. Budgeting is essential and is a MUST for all of us.
John Lowe, Fellow of the Institute of Bankers, is managing director of Providence Finance Services Ltd Stillorgan & Drumcondra and author of the best selling The Money Doctor Finance Annual 2008 & 50 Ways to Wealth (both Gill & Macmillan.) Log on to the web sites or iTunes for podcasts "How to get rich this week" For newsletter tel +353 1 278 5555, email jlowe@providence or info@moneydoctor.ie
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