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Reader Q&A

Readers asked Financial Fix-Ups experts Tara McCarthy and Echo Huang their own financial questions about credit card debt, finding a financial advisor and switching from two incomes to one. Kara McGuire, personal finance columnist and author of the series, shared her two cents on one or two as well.

Last update: November 2, 2006 - 9:54 PM

Hello, I am looking for some advice on what to do with $39,000 I have in savings. I am not sure what debts to pay off. Below is a snap shot of my financial situation. I have a fixed rate, 30 year mortgage at 7 percent. I also have a second mortgage of $39,000 at 7 percent, but it has a five year balloon payment (the remaining balance is due in five years)

I believe both mortgages are not wise to have compared to others on the market but they were my only choice so we could get into our first home. I am interested in refinancing as soon as my early refinancing penalty is over.

One last consideration is that we successfully filed for chapter 7 bankruptcy last year and I am concerned that I will not be able to get a good refinance loan for our home because of this.

Teddy

I believe your biggest concern is the 2^nd mortgage and your ability to refinance after filing a Chapter 7 bankruptcy. You would need to wait at least 12 months after the bankruptcy was discharged in order to have a fair understanding of your credit report and to demonstrate that you can make consistent payments towards your other debts since the filing.

Any potential refinance will be determined by your loan to value ratio (how much you have borrowed compared to how much your home is worth) as well as your debt to income (how much debt you have compared to how much you make). If your loan to value is too high your interest rate may be higher. If this is the case, you may want to consider applying some of the $39,000 to the second mortgage. Otherwise, if you can afford to, you may want to keep paying both mortgages as is and hold onto that $39,000 savings.

Tara McCarthy

My husband and I operate a small family farm. Every year, we have put more and more expenses on credit cards., both regular daily expenses and large farm expenses. Then I went through a five year bout of depression with the in between ups including shopping binges.

Jump to now, we have $87,000 in credit card debt My entire paycheck goes to credit card bills.I work full-time and take home around $1400 a month. My husband's farm has lost money for the past two years.

I've looked into credit counseling, but they can't get me lower interest rates than I already have. I have managed to keep my cards all under 7 percent. I'm afraid bankruptcy would cause us to lose the farm which would kill my husband. He is the 4th generation on our farm.

Aimee

I am sorry that you and your husband are struggling with debt. You are in serious need of some type of relief. I cannot offer you an exact answer without reviewing your total financial situation but from what you have submitted you are enslaved to credit card debt. When people become enslaved to debt they need to make some serious choices regarding "how do I alleviate this debt burden?"

Do you know if you could keep the farm and make ends meet if you didn't have all of the credit card payments to pay?

Also, have you discussed your options under bankruptcy with an attorney? You may be assuming you will lose everything and do not have enough information. I always say to my clients, it's a lot easier dealing with the known than the unknown.

Tara McCarthy

We have three credit cards. Two with really low interest rates and about $4 to 5,000 on each and one with 6.9 percent interest and about $8,000. This is the one still being used. I'm paying off more than twice the minimum on each card every month. Should I pay off the two with lower balances so I can put that money against the larger one or pay off the higher interest as quickly as I can?

Colleen

The interest rates that you have are very good. I would suggest you cease using all credit cards. Then if you can afford to, pay off the smaller cards first, then apply that extra cash to the larger balance.

You are doing the right thing by making double the minimum payments. Cease using credit while you are paying off debt.

Tara McCarthy

I have $50,000 in credit card debt and I'm barely able to make the monthly minimum payments. I have almost that amount of equity in my home. In this case, should I consider a second mortgage or a Home Equity Loan to pay it off before it gets worse?

C.A.

When a person is considering leveraging an asset to manage debt this is a red flag. My first concerns would be:

Would you be able to afford a home equity payment?
Have you reviewed your current cash flow to see if you can cut your expenses?
Are you missing payments to the credit cards?
Do you have a sense of fear regarding your debt?

A lot of people have managed debt by tapping into an asset. This may help restructure your cash flow, but you need to have a sound understanding of your ability to manage the payment, as you will have harsher consequences not being able to manage a mortgage payment versus credit card debt. I ask if you are in fear because I do no want you to make a quick decision with out feeling comfortable with your options.

Tara McCarthy

If you can barely make minimum payments on your credit cards, it's very likely that you cannot make timely payments on your home equity loan or home equity line of credit. Even though interest on home equity line of credit is tax deductible, missing payments would put your home at risk. I do not recommend using home equity in your situation.

Echo Huang

After baby #1, we had our child in daycare half days and my husband worked half days and picked up the baby at noon, so we were living on 1.5 incomes.

After a recent baby #2, I continue to work as a high school teacher and my husband now stays home with the kids full time, as we don't want them in full-time daycare. It didn't make sense money-wise to have both in daycare 1/2 days with him only working 1/2 days, since the money is a wash.

Any tips on what things to cut back on now that we are living on one income after being used to living on 1.5? We are down about $1,400 a month. We feel like we've done a lot of things already (cancelled cable, cancelled one cell phone, we are on dial-up Internet to save money, etc.).

Any ideas for how my husband can earn money from home? We don't want him to get a night job, because then I'll never see him.

I'm worried we will rely on the credit card to pay for things we used to easily pay for!

Vicky

As a parent of an 11 month old and a 2 year old, I know the major cost of day care and understand why it means making big changes for many families. And it sounds like you've made the obvious cuts. Depending on your circumstances, you could try going from two cars to one, switching where you shop for groceries and what food you buy, and evaluating your insurance needs to see if raising your deductible or making other tweaks could save a bundle. If you're saving a lot for the future and feel confident that you are on track for retirement, you could reduce how much you're saving for now and beef it up once your children are out of day care and back at work.

Without knowing your husband's skills, I'm not sure if it's possible for him to keep his toe in his profession and do consulting part time. If it isn't, a home based business is an option, but beware of ones that require large amounts of money up front and check with the Better Business Bureau for complaints. Other Minnesota stay-at-home dads might have ideas. Visit www.mdah.org.

Kara McGuire

I want to know how to find a financial advisor. How do I know this is the best advisor for me? What is the typical amount a person pays to have a financial advisor? Do financial advisors help with retirement along with paying off debt?

Amy

I would recommend that you visit this link for more information on financial planning: www.fpamn.org

I am a member of the FPA-MN Chapter. Some advisors have account minimums for accepting new clients.

Financial planning fees up front could range from $500 to $10,000 depending on your situation. After you visit the link above, call a few advisors to ask a few basic questions on the phone before the face-to-face meeting, which many offer free of charge. Choose someone you can trust and whose fee structure fits your situation. You can also ask others for referrals.

Echo Huang

Other resources for finding a financial advisor include: www.napfa.org and www.garrettplanningnetwork.com. The government has also set up a web site that addresses many consumer money issues, including this one: www.mymoney.gov/planning.shtml

Kara McGuire

How do I find a professional that will sit down with me and go over my budget? I need help to get my finances back on track but I don't know how to go about it. I am not sure if a home equity loan to pay off my credit card debt is the answer or if I should just put myself on a payment plan that will pay off my debt in 12- 24 months. I am also interested in sitting down with someone that can show me areas where I can cut back to save a few extra dollars that could go toward paying off my debt.

Kelie

I don't know exactly how much debt you have, your interest rate or other needed details. But in general, I do not recommend using home equity to pay credit cards if you have problem making payments to credit cards.

Try to go back to most basic financial planning principle: to live below your means. A credit counselor can help you with your budget. Find one by visiting www.nfcc.org. In addition, some credit counselors may be able to help you negotiate with some credit card companies to get the minimum payments lower and different terms, which would ease your pressure now.

Echo Huang

A frequent question I received after the profile of the Benson family with six kids and another on the way is why family size was not addressed in the recommendations?

Kara McGuire

The reality is that the Bensons do have seven kids. That is not going to change. During our first session I did make a comment "did you figure out what is causing that?" They said they are not planning to have more children.

My only suggestion to them on this matter is -- the kids are here. Better adjust your budget for it, which they are now trying to do.

Tara McCarthy

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