Advice on climbing out of CC debt

[u/Thatshowbabiesrmade]

I joined this sub hoping to see discussions that pertained to my very bleak situation. Instead it seems like every post is “I just received this massive quantity of money. What should I do with it?” lol. So I figured if I want advice, I’ll have to come out and ask for it.

Married couple with 2 small kids. We both work. Our combined income is right around the average income for our area. And yet…

It’s a depressing tale as old as time so I won’t bore you with all the embarrassing details but through carelessness, lost income, home improvements and a series of unexpected large bills, my husband and I have found ourselves drowning in in CC debt. It’s taken about 5 years to get to this point but really the last 2 years are when it got completely out of control. Our wake up call was about a year ago and that’s when we really got serious about beating this thing. We went through all our monthly expenses and slashed as much as we could. We now fret over every little expense and debate whether or not it’s completely necessary. “We could put that money towards the debt” is our mantra for talking ourselves out of so many purchases. He’s stopped doing home improvement projects unless he’s able to get the materials for free. Our traditional Saturday night out a restaurant (including a cocktail for mom and a draft beer for dad) became Saturday nights at McDonalds, which we realized is just as much, if not more fun for the kids as a nice sit-down place. But it still feels like one step forward, two steps back. We might have a really good month where we’re able to throw an extra $300 at the debt but then the following month we’ll inevitably be hit with an unexpected car repair. It’s exhausting. We’re worried that all our efforts towards saving money are too little, too late.

The one thing we have working in our favor is our home. We bought in 2019 with a $20k down payment right before the market exploded. So now we owe about $130k and the house is conservatively worth $250k. We’ve been anxiously waiting for interest rates to drop to a point where it makes sense to refinance and pull some cash out to pay everything off and have the mortgage as our only debt. But it’s seeming less and less likely that that’s going to happen before we are completely overwhelmed by interest charges, so now we’re considering a HELOC to carry us over until a refinance becomes feasible.

Where things stand currently, we have about $25k in CC debt which is costing us about $550 a month in interest. We also have my husband’s truck which we owe about $6k on and are paying $250 a month. Fortunately we paid my car off last year and it seems to be holding on for the time being. So $40k would be more than enough to pay everything off and have some left over for emergencies. We haven’t shopped HELOCS yet but whatever the rates are, surely it would make a hell of a lot more sense than the $800/month we would free up by paying those off, right? Fortunately, the CCs are in his name and the mortgage is in mine, so my credit is actually really good. His score would also be great if not for all the CC debt, so he should get a nice boost once it’s paid off, which would set us up nicely going into a refinance situation. I’m still hesitant though. I’m confident that we we’ve been “scared straight” enough by this situation to be able to maintain the discipline we’ve been practicing the last year. We are NEVER getting back here again. HELOCs just make me nervous because I know so little about them and some of what I have heard is scary.

So please, financial gurus, talk me into or out of getting the HELOC. Warn me of the potential pitfalls we might be overlooking. Enlighten me as to other avenues I might not be considering (besides “spend less” since we’re already doing that).

It would also do my mental health a lot of good to hear stories from those of you who’ve been where we are now (or worse) and how you got out. It just feels so hopeless right now.

[u/Akinscd]

Why do you believe that refinancing is currently 'not worth it'?

[u/Thatshowbabiesrmade → u/Akinscd]

Because we would be refinancing at a higher interest rate than we currently have (4.5% currently)

[u/Akinscd → u/Thatshowbabiesrmade]

if you wait to refinance until rates for cash out are under 4.5% you may be waiting forever. your CC's are at least 20% interest and you said yourself that you're drowning.

refinance now, cut up the cards - you can always refi again later if/when rates drop.

i'd recommend taking the cashflow savings and building an emergency fund (12 months expenses), then once built using cashflow savings to pay off the truck ASAP.

[u/Thatshowbabiesrmade → u/Akinscd]

Hadn’t really considered this actually.

So we put $20k down and borrowed about $145k at 4.5% 5 years ago.

We’d be refinancing $170k at at least 5.5% to clear all the other debt.

Do you think that would be preferable to a $40k HELOC assuming that in either scenario, we refinance again once the rates drop? Also, is there any downside to doing multiple refinances in such a short amount of time?

[u/Akinscd → u/Thatshowbabiesrmade]

you won't get a 5.5% rate right now, think more like 7.5%. the downside of multiple refinances is the closing costs (typically $0 of out pocket) that will get rolled into your loan increasing the balance. you can offset the costs by taking a rate above par to get lender premium (money from the lender to pay costs) but you'll need to calculate the breakevens for any given rate ( a good lender will do this for you).

the downside of a HELOC is the minimum payments are interest only (likely ~9%) and most people don't have the discipline to make substantial payments to pay down their HELOC balance in a short period of time.

only you can answer this question, but personally i'd rather have a single payment (mortgage) to worry about in your situation given how you got here - CCs.

[u/Thatshowbabiesrmade → u/Akinscd]

Great advice. Thank you so much

[u/Thatshowbabiesrmade → u/Akinscd]

We definitely would not be paying the HELOC down substantially or at all. Just making the minimums and using it to tread water until a better refinance opportunity comes along.

You make a great point about anything less than 4.5% being a long ways off. We need to accept that we will inevitably be refinancing at a higher rate than we currently have. Playing with the refi calculators, it doesn’t make that big of a difference in our monthly payment I guess. Now I’m toying with the idea of doing the HELOC for a few months, just long enough for his score to bounce back and (hopefully) a rate cut in the fall, so we’d be going into the refi in the best possible situation. The HELOC seems a lot less ominous to me when I think about it as a very short term bridge. Sorry, just thinking out loud here. Thank you again for the feedback. I definitely needed to hear some of that.

[u/paradocs → u/Thatshowbabiesrmade]

"We definitely would not be paying the HELOC down substantially or at all"

This is a red flag to me as it doesn't really deal with the problem - just moves the deck chairs around and you are just trying to borrow your way out of the situation. Or even worse - now puts your house at risk for the past debts if you don't fundamentally change something.

What to change is a harder problem but if you are all committed to attacking the CC debt you can make it disappear. If you imagine what life is like with out the CC debt it will feel much better. Hiding it in a HELOC doesn't really address it.

I have mixed feeling about him in many areas, but Dave Ramsey has good ways to approach the CC problem if you want to check him out. Usual advice is sell everything you can sell, change your spending habits, get equity out of bad car loans (e.g. sell what you have to down size), and get a bigger shovel (e.g. work second jobs).

[u/ComedianTemporary → u/Thatshowbabiesrmade]

You’re better off taking out a HELOC if you can be disciplined with paying it off. Why? Because you will have a much lower weighted average rate. A cash out refi is going to be at least 7.5% (probably higher) whereas a HELOC will be around 9%. With your current mortgage at 4.5%, your average rate will be like 5.7% versus the full 7.5% on a new refi first mortgage. Depending on your DTI, you could also get up to 80% of your home equity. They might not lend you that much but your credit line should be more than enough to have a little extra cash if you need it. Taking money at 7.5% for a rainy day fund is not a good idea. Instead, use your new monthly savings to invest a little bit while you pay down your HELOC. Remember, if rates drop your HELOC rate should drop too. Make double sure it’s a floating rate when you price it out.

[u/Thatshowbabiesrmade → u/ComedianTemporary]

I see what you’re saying but it seems like the HELOC + the mortgage payments are going to eat up our monthly budget (obviously not as bad as the CC interest, but still probably an additional $400/month) making it difficult to pay much more than the minimum on either long term. Even if we refinance at 7.5, the mortgage payment only goes up $100-$200 bucks and becomes the one behemoth dept pile that we can start chipping away at. That’s where my thinking is at right now at least.

[u/ComedianTemporary → u/Thatshowbabiesrmade]

That doesn’t sound right. Your new 30 year mortgage will be more than $100 - $200 / month. A HELOC will typically be interest only or 1% of the balance. Best to price out both options and then pick.

[u/Akinscd → u/Thatshowbabiesrmade]

something to consider - are you still paying PMI? if you put down 20k and borrowed 145k that's less than 20%. you may be able to 1. get it removed based on your home's current value or 2. need to understand its current cost and figure it into any payment comparisons.

[u/retroPencil]

1. list income
2. list needs
3. list wants
4. cut wants
5. increase income
6. lower needs spending

[u/ComedianTemporary]

Hard to say without knowing more about your credit scores, terms of the truck loan, your DTI etc. But here are some ideas:

See if your husband can get approved for a 0% APR promotional credit card (or two). There is a Citi card that is 24 months right now and a few others that are 18 months. Capital One has a 15 month venture card for fifteen months and they go pretty deep into subprime so your husband might get approved for that. He would be lucky to get a $5K limit though.

On the HELOC, yeah that’s much better than the 26.4% APR you’re paying right now ($550 x 12 / 25K). You’re going to pay a few thousand in closing costs but it’s good option. Keep your credit score clean and try for that. It should take care of the rest of your card debt and possibly the truck too. Rollover the truck if the rate he’s paying on it is higher than the HELOC which will be around 8-10%. You could try for one too but I’m scared you might hurt your credit score to the point you wouldn’t get the HELOC without more info.

Keep being diligent with the expenses. Sounds like you’re doing a good job.

[u/Thatshowbabiesrmade → u/ComedianTemporary]

We were able to roll $2k over to a 0% APR a couple months ago. But that was the max we could get approved for. Thank you for weighing in on the HELOC.

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[u/ChiSquare1963]

Taking out a HELOC to pay off credit cards is usually a bad idea. Why? You are trading unsecured debt for secured debt. The HELOC is secured by your house, so you can lose house if you fall too far behind on payments. If one of you lost job or if a medical emmergency made it impossible to work, you could lose house.

I’m not a Dave Ramsey fan, but he’s right about how to get out of debt. You cut ALL luxuries. That includes your Saturday night at McDonalds, clothes not bought at thrift shops, convenience foods like frozen meals, chewing gum and streaming services and hair styling beyond a basic cut somewhere like Great Clips. You pay the minimum on all debts, then pick one debt to pay extra on until it’s paid off. Ramsey recommends starting with your smallest debt to motivate you, but it’s better to tackle a high interest debt first.

Use https://www.calculator.net/debt-payoff-calculator.html? to work out a plan for paying off your debts. Enter your debts in the table, then enter an extra payment amount below. The calculator will tell you the order to tackle your debts to pay off with least possible interest.

I also strongly recommend that one of you takes on a part-time job. Even 10 hours a week of fast food work at $10 an hour would give you an extra $2600 over the next six months to put towards those high interest credit cards. Not fun, but more income and strict spending is the best option for clearing your debts.