More Questions About Debt

Updated on March 27, 2010
L.B. asks from Berwick, ME
16 answers

I received some very helpful responses regarding my first question debt consolidation. I have another question; What do you think is a better way to payoff debt when you have more debt than money coming in; Suppose you were lucky enough to receive a big enough inheritence to payoff credit card debt in full,
what is the best option;

1. Use all the inheritence to payoff the credit cards in full?

2. Use the inheritence to pay off half the credit card amount and consolidate the rest of the debt paying it off in 3-5 years and putting the other half of the inheritence in a money market or something for an emergency fund?

3. Are there any other options?

I like option 1 my husband likes option 2, what is best for our financial future?

3. Are there any other options?

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answers from Hartford on

I would pay off your credit card debt first. I'm not sure what info you found about consolidation, but it may affect your credit. Are you going through a company for the consolidation or are you going to put it all on one credit card?

If you do want to save some, put a good chunk towards the credit card debt and see if you can get a lower interest rate credit card and consolidate the remaining debt. I would also pay off the credit cards with the highest interest rates.

Ultimately paying off all the credit card debt first would be the best idea, but having an emergency fund is important too.

I can totally relate to your situation. I was in a huge amount of credit card debt, but finally worked with a financial advisor and he helped us tremendously. If you want to discuss further let me know.

2 moms found this helpful


answers from Jacksonville on

IF you received a windfall that was enough to pay off your credit cards, then, except for keeping out enough to cover emergencies (Dave Ramsey calls this an "emergency fund") ... emergencies meaning you have a blow out on a tire that MUST be replaced; the washing machine completely dies and you must repair/replace; plumbing problem and you MUST pay the plumber... that sort of thing....
Once you save out some "emergency" fund money ($1,000.00?) then pay all the rest to the credit cards. Funding investments is a great idea ONLY if you expect a return on your money LARGER than the "return" you "earn" by paying off your credit cards... i.e.: What interest rate does the balance on your credit cards carry? If you are carrying a balance with an interest of 11.99% (fairly average/good rate for a credit card right now), then if you pay off the balance, you just "earned" "interest" of 11.99% annually on that money, by not having to PAY interest at that rate. And, that is a GUARANTEED rate of return... unlike any investments your husband is probably considering.

So: Yes, keep a small amount out for emergencies (don't get crazy, but $1000.00 is reasonable), but then pay all the rest toward existing debt.

2 moms found this helpful


answers from Washington DC on

My suggestion would be to put 1 month's worth of expenses into a savings account (or a safe in your house) as an emergency fund. And by emergency, it means a flat tire, broken appliance, pay cut, NOT that really cute pair of shoes is on sale.

Then use the rest of the money to pay off as much debt as possible.

By having the money already on hand, if an emergency comes up, you won't have to turn to credit to cost the expense, which will land you back into debt.

Once your debt is gone, use the extra money each month that was once dedicated towards the debt to build up your savings to ensure that you won't end up back in that boat again.

1 mom found this helpful


answers from Minneapolis on

If you have no money in an emergency fund and can get at least 3 months into one that is a very good thing to do. If you already have an emergency fund you would not benefit much from putting the money into a "Money Market, CD, or anything of the sort" because the interest you will earn would not be anything to compare to what you are loosing on your credit cards. Now you would want your emergency fund in a Money Market account where you can easily get money out without any fees if needed. Unless you have loads of money to gain interest you loose much more on what Credit Card companies charge in interest then you would ever earn in an account.

So Yes to emergency fund if you do not already have one at least 3 months of income. Preferably in a money market account with easy no fee access to the money.

If you already have the emergency fund in place then putting half the money in an account accruing at max probably 4% if you are even that lucky does not do you any good if you are getting charged 11% or more on your credit cards in interest, which you most likely are. If this is the case then just pay off your debt and cut up your cards.

If you don't have the emergency fund then you don't want to risk paying everything off and then having an emergency and then just have to start charging some up again and by saying this don't just pay off your CC debt by half make sure you have 3 months of income in savings first, then the rest goes to the credit card debt. I hope this all makes sense.

1 mom found this helpful


answers from Chicago on

You got a lot of good responses so I will just add that if you did use the inheritance to payoff all cc debt what is the likely hood of racking the cc up again. I think you should really sit down with your husband & look at your entire financial situation to see how you got into debt. Ask yourself if you are living beyond your means like expensive cars, shopping habits, mortgage/rent payment is high, etc. See what else you can do to cut your monthly outgo. Obviously investing for retirement is a good idea to like a roth ira & having an emergency fund 3-6 months is very important. My husband & I are in the Dave Ramsey class now & we have learned so much, I highly recommend you look into taking the class, he also has online classes.

1 mom found this helpful


answers from Boise on

Again, Dave Ramseys' Total Money Makeover (I was a skeptic). All you need is the book, not the classes. My mom is going to be selling my grandparents' house soon and I am BEGGING her to read this beforehand. With his book (we started in September), we have paid off one credit card, and about half our car loan, and all of our OB care for the baby due in 6 weeks. If we stay on track, we will be able to pay off the hospital, the car, and half of the two remaining credit cards by the end of the year!!! And that is with my maternity leave. I am so looking forward to getting to that point, and being able to save for our future and start working on our mortgage. Our plan is to be totally debt free (including mortgage) in less than 10 years, and to show our children that you don't have to be tied to debt.

1 mom found this helpful


answers from Pittsburgh on

Get Dave Ramsay's TMM. He would say the following steps:
1. Put $1000 in bank for ENERGENCY
2. Pay off ALL credit card debt
3. Cut up said credit cards and DO NOT use again.
4. Start paying off your home.

That's over simplified but basically a plan.

As for your specific question, #1 option is correct. It is best for your financial future.

Never consolidate---CON solidation is a CON.

Get the book. Seriously, it works. Live on less than you make and you will never have debt again. I tell you that from the comfort of my paid off house. I'm 46 and my house has been paid off for 5 years. It's a great feeling. Don't buy into the "monthly payment" myths out there.

1 mom found this helpful


answers from New York on

I would suggest try to negotiate with the credit card on lowering your debt if you pay it in full. If you try doing so – be careful, they can find out you got money and will try to take them all. Wherever you do – make sure that you have it in writing.
I believe you better of paying it and just starting fresh.
Good luck

1 mom found this helpful


answers from Knoxville on

I took the Dave Ramsey class last winter. Lots of great info given. His suggestion is to always, always have an emergency fund of $1000 in the bank. This is to be used for emergency only - hot water heater needs replacing, car breaks down, etc. Next make a list of all your debts in order from smallest to largest. Pay off the smallest first and work your way down the list. Now, personally, I would pay off as much of your credit card debt as possible. Cut up the credit cards and do not add any more debt to them. You goal is to pay them off. Cut out any extra spending - this means pack your lunch and not eating out. Purchase a water bottle to refill and don't walk past the soda machines or coffee. Take a look at other monthly expenses - what do you not need? look at phone plans, grocery bills, gas bill (consolidate trips & car pool), cut out any & all unnecessary purchases. I know it will be hard, but you and your husband can work together and remind each other that you are doing this for your future.
Look for the Dave Ramsey book at the library or used book store. Good Luck and I know that you can get out of debt.

1 mom found this helpful


answers from Kansas City on

I would go get the Dave Ramsey Total money makeover for $15.00 and follow it. We have been doing it since January and are about to pay off our first credit card.

1 mom found this helpful


answers from Rochester on

Get Out Of Debt book - (the GOOD book) Pam Young.

Pay off the HIGHEST interest rate credit cards FIRST. As many as you can.

Set aside the $10-$15 for the book, and $20 for a pizza for the first month's anniversary of paying off your debt. : D

I don't know your debt, but check out the book - you may be able to order e-book. I'm not sure. You might find it in the library. But read before you do anything if you can wait that long.

Good luck!

1 mom found this helpful


answers from New York on

Take it from someone who's been there and is still struggling. I'm 62 years old and my husband suffered a massive heart attack 15 years ago, he was 48 years old. Needless to say that when all this happened we were not prepared financially and it threw us into a tailspin that we still haven't recovered from .We've been on disability since then. We had some pretty large debts at the time. We also inherited some money from our parents (just like you) around the same time as our crisis hit us, so we decided to pay off our debts in a lump sum. It was the wrong thing to do because now we have nothing to fall back on. If I had to do it all over again (and Lord knows I wish I could) I wouldn't pay off my debts all at once but pay them off a little at a time while investing my inheritance in either an 'ING' savings account or something similar where your money is working for you. I would use the dividends to pay the creditors this way your money is still there for you in case an emergency arises. At least you'd have a little 'nest egg' to back you up when you need it. You might look into a Public Credit Union because they work for their members and not the other way around like a bank does. They offer low percent loans that may help you consolidate your credit card debts. They require you to join the credit union, but their fees are usually pretty low, the one I investigated charged a flat fee of $5., just make sure there are no 'strings' attached to the fee. You can find these credit unions by Google-ing them, "Public Credit Unions" and a list of them will come up. I don't know where you live, but the one I checked out (and I checked out two of them in my area) that I liked was United Teletec.
Good luck to you. Keep a cool head in this situation because it will serve you well in the end.

P. F.
Monmouth Cty., NJ

1 mom found this helpful


answers from New York on

1) We changed our lifestyle dramaticly, many cut backs so we weren't living in a way that created more debt then income
2) We worked and paid off everything possible before starting a savings
3) we used payments we would have given to credtors as our savngs once things were paid off.
4) we now own all vehicles outright, have 0 credit card debt, 1 student loan and 2 real estate investments (thanks to the savings we created)

Living pretty much debt free is amazing. I say pay off whatever you can fast as you can. The physical and emotional burden being gone is worth more then the money. Right now investments aren't even paying out more then what you end up owing in interest rates. Make sure you know exactly what your returns vs. inteerst payments are if you go with tryng to save while still hanging on to debt

1 mom found this helpful


answers from Los Angeles on

it is rough economic times so if you think there's a possibility of you and your husband losing your jobs and needing an emergency fund, go with number two. if that's unlikely, i say pay off all of the debt and put the money you would have used to pay monthly had you chosen #2 towards an emergency fund.

1 mom found this helpful


answers from Allentown on

Hi L.,

If you eliminated the debt, could you stay debt-free based on your income, AND be able to put away some money for "emergencies"? If so, then I would do that.

If not, then you may want to consider investing some of that money into an education plan for yourself or your spouse for financial security in the future.

Either way, credit cards charge, at best - 9% interest and savings accounts will only get you about 1-2% on your investment. So you would be losing money every month. If you don't get enough to pay off all of the debt I would pick the one with the highest interest rate and eliminate that, but still set some aside for an emergency fund.

Having been in this situation many years ago, we chose to pay off enough of the debt to allow my husband to quit his second job, took out a student loan and sent him to night school. That decision was the best investment for our family.

I am not a financial planner, so please understand that I am only going on our experience. Hope this helps.



answers from San Francisco on

It depends on your interest rate. I heard a financial woman on tv the other day talking about something like this, and she felt you need to have some cash on hand. So she would side with your husband. I personally hate debt and paying interest, so I would tend to side with you, but the financial woman would side with your husband.

If you get a reasonable interest rate on a consolidation , and can pay it off in 3-5 years, you could think of it kind of like a car loan.

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