Suze Orman's Action Plan (7 page)

The only solution is to stop thinking of your credit card as a safety net if you run into trouble. The only true safety net is a savings account.

ACTION:
See if you can apply for a balance transfer to a low-rate card. Because you have a high FICO score, you may be in luck. I recommend checking out credit cards offered through credit unions. By law credit unions are currently allowed to charge a maximum 18% APR on credit card balances. That’s a lot better than the 30% or more many bank credit card issuers are charging these days! And with a strong FICO score you have a good shot at qualifying for a single-digit interest rate on a credit union card. Go to
creditcardconnection.org
for the best deals on credit union cards.

The idea is to move your money to a card with a
low introductory rate and then push yourself to get the balance paid off before the low rate expires. Please read the fine print very carefully. For example, the great rate typically applies only to the balances that are transferred; new charges you make on the card often will carry a higher interest rate. There’s also the added problem that many balance transfer deals now charge a flat 3% fee on the entire amount transferred. That can quickly add up. My best advice is to push yourself to pay off the balance, rather than rely on a transfer. Even a low interest rate on a credit union card still costs you plenty. The best action—now and forever—is to get out of debt, period. But if you need an interim plan while you are turning over your new spending leaf, then definitely look into a credit union credit card. Then push yourself to get that balance polished off. In “Action Plan: Spending,” I explain how to reassess your family’s income and expenses to find more money to put toward paying down credit card debt.

ACTION:
Here’s how:

• Pay the minimum amount due on every card each month. That’s your only shot at keeping
  your FICO score from falling further. It will also lower the odds that your credit card company will close your account, though a low FICO score may be enough to trigger a cut or cancellation.
  

• If you have at least a five-month emergency savings account and you can move your balance to a credit union card with an interest rate below 10%, divide your monthly savings between building up your emergency fund (eight months is still the goal) and paying off more of your credit card balance. For example, let’s say that the minimum due on your credit card this month is $100 and you have $300 to put toward your financial goals. That leaves you with $200 above what must go to the minimum payment. I want you to split that $200 in half: $100 goes into the emergency fund and $100 is added to your credit card payment (meaning you will pay a total of $200 to the credit card this month). There is no substitute for having real savings set aside so you can handle life’s inevitable surprises and emergencies.
  

• If you don’t have an eight-month emergency savings fund and you can’t transfer your high-rate balance to a lower-rate credit union card: I want you to pay just the minimum due on your credit card and keep building your emergency fund. If you are stuck with a bank card that charges you 20% or 30% and you face the very
  real risk that even if you pay off the card you will see your card shut down or your credit limit cut, you need to build your own savings—and fast. I want to repeat that this is not an ideal situation, but it is just too risky for you to be without an emergency savings fund.
  

• If you cannot transfer all your credit card debt to one card—preferably a low-rate credit union card, here’s how to tackle balances on multiple cards: Line up your cards and put the card that charges the highest interest rate at the top of the pile. That’s the card you focus on paying off first. Send in as much money as you can each month to get that balance down to zero.
  

• Once the first card is paid off, focus on the second card in your pile: the card with the next-highest interest rate.
  

• Keep up with this system until you have all the cards paid off.
  

Of course, the big challenge is finding extra money every month to put toward paying off your credit card debt. In “Action Plan: Spending,” I have suggestions about how to “find” more money in your month by reducing your expenses.

ACTION:
Focus on paying the most you can on accounts that are the least late. The longer unpaid debt has been on your credit reports, the less effect it has on your FICO score. So if you can make current an account that is past due by only 60 days, it will help your FICO score far more than paying off your balance on an account you have been past due on for three years. I want you to organize your credit card statements into two piles: cards that are past due for less than one year and those that are past due for more than one year. Start with the first pile: Pay off the account that is closest to being current first, then move to the next card in that pile. Once you have paid off the cards in the first pile, I want you to use the strategy I covered in the action step above for paying off cards that you are more than one year behind on.

ACTION:
Do not do this. Even if you still have enough equity to keep your HELOC open, this is a dangerous mistake. You are putting your house at risk. When you borrow from your HELOC, your home is the collateral. Let’s say you get laid off or face a furlough—as we all saw, and many experienced, in 2009, that’s a fact of life during recessions—and suddenly you can’t keep up with the HELOC payments on top of all your other
bills. Fall behind on the payments and you could lose your house.

As much as I want you to pay off your credit card debt, you need to understand that credit card debt is “unsecured” debt. There is no collateral that a credit card company can easily force you to hand over to settle your debt. So it makes no sense to transfer your unsecured debt into a secured debt—a HELOC—where you run the risk of losing your home if you can’t make the payments.

ACTION:
Do not do this. I know it is tempting, but it is such a dangerous move. Anyone who has been listening to my advice over the years knows I have never approved of 401(k) loans because you end up paying tax twice on the money you borrow. But I can understand that if you are staring at an interest rate of 30% on your credit card, you figure the tax penalty is worth paying.

Again, I need you to focus on the possibility of losing your job. I don’t care how valued an employee you are, in rough times we are all vulnerable. And even in good times, you can’t tell me there is a guarantee your company won’t ever choose to downsize, revamp, or send some jobs to less expensive markets, domestic or foreign. Look, I hope you never have to deal with any of those scenarios,
but my job is to make sure you are prepared to handle the possibility that you may face a job loss at some point.
Any
point.

If you have an outstanding loan against your 401(k) when you are laid off, you typically must pay off the loan within a short period of time. Fail to do that and it becomes a withdrawal; that means you owe tax on the entire amount immediately and a 10% early-withdrawal penalty if you are under age 55 in the year you left service. And tell me exactly where you will get the money for that. Not your credit card, that’s for sure.

An even bigger issue is that you need your 401(k) for tomorrow. Use it today and what will you have in retirement? Can’t think about that right now? Excuse me, you can’t afford
not
to think about that. And that brings me to the issue of bankruptcy. I certainly hope this never happens to you, but in the event you must declare bankruptcy, one silver lining is that any money you have in a 401(k) or IRA is protected. That is, you will not be required to use your retirement savings to settle your debts. It is a permanent asset for you. Don’t blow it by using the money to pay off your credit card debt.