Dig out from under heavy credit card debt

Dollars & Sense

April 27, 2003|By Liz Pulliam Weston | Liz Pulliam Weston,SPECIAL TO THE SUN

In an effort to simplify my life, I tried to consolidate my credit cards with a loan from my bank. I also contacted a loan-consolidation program. I was declined both times.

I thought about transferring my balances to one card, so I would have to worry about only one due date and interest rate, but I can't because my credit limits aren't high enough. Can you send me a list of financial institutions in my area that can help me?

The problem isn't that your credit limits are too low. The problem is that your balances are too high.

Subtle distinction? Not really. Your description of your situation puts the onus on the mean old banks for not lending you more money. The reality is that they've lent you more than enough - so much so that you've trashed your credit rating and spent yourself into a corner.

We know your credit is bad because you were turned down for a loan at a time when lending standards are pretty loose. In addition, your credit card companies aren't rushing to raise your credit limit - something they tend to do for most other people, including those whose credit is just passable.

So forget the idea, for now, of simplifying your life by consolidating your debt. Instead, concentrate on paying it off. Being debt-free will restore both your serenity and your credit rating.

We have nothing saved for retirement. We are a childless couple in our late 40s with about 20 years left on our mortgage. We both work full time, but our income just pays the bills with nothing left over. We've tried saving money by changing car insurers and selling unneeded luxury items. We have one car loan, no credit card debt, no home equity loans - and no life insurance. One of our employers offers a 401(k) plan. We were thinking about getting a home equity loan in our later years, or maybe selling our home and renting, or moving into an apartment and renting out our home, but small apartments in this area rent for as much as our mortgage. Thank you for any advice.

You could be in much worse shape. Having 10 years of mortgage payments behind you and little other debt puts you ahead of the many folks who are up to their ears in payments.

But you need to get serious about saving. Definitely take advantage of your employer's 401(k), and consider funding Roth individual retirement accounts. You don't get a tax deduction for your Roth contributions, but your withdrawals in retirement would be tax-free.

You can free up money to invest if you try hard enough. You've done the easy stuff - shopping for cheaper insurance, selling unneeded possessions. Now you've got to dig a little deeper. Books such as Amy Dacyzyn's Tightwad Gazette and Web sites such as the Dollar Stretcher, at www.stretcher.com, are full of ideas for whacking the fat out of a budget.

Given your late start, though, you might very well need to tap your home equity to fund your retirement. If your plan is to sell or rent your home, you'll probably need to move to a less expensive area to free up enough cash.

Alternatively, you can get a reverse mortgage, which gives you monthly payments for the remainder of your life. The loan is paid off when you die or you sell the home. If you're interested in exploring reverse mortgages, AARP has an excellent guide at www .aarp.org/revmort.

You also might need to work longer than you had planned. Extending your working life not only gives you more time to save, but it puts off the day when you'll need to draw on those savings. In addition, working longer shortens the length of the retirement you'll need to fund, because there will be less time between the day you retire and the day you die. That sounds grim, but many folks today find the idea of retirement overrated and prefer to work at least part time for social and emotional reasons as well as financial reasons.

Speaking of dying, you probably do need to carve out some funds for life insurance. If you can't pay the bills without your spouse's income, and vice versa, then you need the coverage. Fortunately, term insurance is relatively inexpensive and should be easily obtained if you're in good health.

Liz Pulliam Weston is a contributor to the Los Angeles Times, a Tribune Publishing newspaper.

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