Your Money : Money Talk : How Just One Missed Credit Card Payment Can Put Debtor in Catch-22
Q: About 18 months ago, I transferred a balance from a credit card with a 12.9% rate to one that had a 6.9% rate. Shortly afterward, I had some personal problems and missed a payment. My rate skyrocketed to what I’m paying now, 26.9%. My balance is huge and keeps growing. I have tried to apply for a different card, now knowing that I should make my monthly payment regardless. But I keep getting turned down. Any advice?
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A: Sounds as if you’re stuck. Yes, the credit card company was sneaky for slipping in that whopping increase. But you shouldn’t have blown off that payment. Not only did that lapse put you in this quagmire, but it probably led your credit card issuer to report the missed payment to credit bureaus too, which is why you’re having a tough time getting a new card.
If you can’t get the first credit card company to take you back, you’ll probably have to solve this the hard way--by paying off the balance as quickly as you can.
Dedicate every available dollar to making payments. Cancel your cable subscription, eat beans, have a garage sale, take a second job--whatever it takes. Make weekly payments so that you’re continually eating away at the principal. And once it’s paid off, make a vow to yourself to pay off your bills each month or to pay cash. Remember: If you carry a balance, the odds in the credit card game are very much stacked against you.
Hard Assets for Hard Times? Hardly
Q: I know you were joking in a recent column when you said jewelry wasn’t much of an investment but that it could come in handy if you should need to flee the country. But that’s a reason a lot of people in unstable places buy jewelry--so they have something to bargain with in case things go really bad. With all the Y2K worries, doesn’t it make sense to put some of your portfolio in hard assets such as jewelry or coins? Isn’t that a smart hedge against disaster?
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A: Sister, if things get so bad in the United States that you need to bribe customs officials to get out, you can bet there won’t be anywhere better to flee to.
The U.S. is among the countries doing the best job of preparing for year 2000-related mishaps, largely because Americans are taking the threat seriously.
Maybe too seriously. Tabloids have fun scaring people with headlines about impending Y2K disaster. Even sensible people start to wonder if they should be piling up canned victuals, shotgun shells and gold coins to buy supplies. Yeah, right. As if the gas station attendant is going to know what to do with a Krugerrand. He can barely make change with U.S. paper money.
Lord knows there will be glitches, perhaps some big ones. But anyone who uses a computer, an ATM machine or even a VCR already knows what to do when the machine crashes: You pound it in frustration, curse a blue streak, complain piteously to anyone who will listen, and then you go do something else for a while.
Don’t Make a Bad Situation Worse
Q: I’m 48 and my husband is 51. We have unwisely run up more than $40,000 in unsecured credit card debt over a number of years. We have no equity in our house. We know it’s almost always a terrible idea to borrow from a retirement plan. With the interest savings, though, we wonder if we couldn’t get this debt paid off quicker and save ourselves more money overall by taking money out of my husband’s 401(k). What sort of formula should we use in deciding if this will help us or not?
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A: How much a 401(k) loan will ultimately cost you depends on what kind of returns you would have earned on the money had you left the 401(k) alone. Under most scenarios, the “interest savings” you might get from refinancing your debt would be overwhelmed by the future returns you’d be giving up.
If you’re game for a few numbers, here’s how it might play out. Say your husband’s 401(k) savings earn an average annual return of 10%. If you borrow $40,000 from the retirement plan and pay it back at 8% interest, you would have about $3,000 less in your 401(k) at the end of the five years than had you left the money alone. You would also pay about $10,000 less in interest, assuming your credit cards charge an average interest rate of 16%. So far, it looks as if borrowing from the 401(k) is a good deal.
But wait. You would continue losing ground from there, because that missing $3,000 can’t earn future returns for you. In 15 years, you would be more than $13,000 behind. The longer the time span from the time of the loan and the higher the returns you could have earned, the worse the damage becomes. In 30 years, you’d be nearly $60,000 behind on an account returning an average of 10% a year.
Now, you could come out ahead if you invested that $10,000 in interest savings, preferably by boosting your 401(k) contributions if possible, instead of spending it on more stuff. But most people don’t have the willpower to do that.
Trading your future security for immediate gratification is what got you in financial trouble in the first place. Don’t make things worse by raiding your retirement account.
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Liz Pulliam is a personal finance writer for The Times. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
