How to dig out of debt

Michelle Singletary
Columnist June 25, 2011

During my online discussions, questions about the best way to handle credit card debt and the repercussions from it still dominate. Here’s some advice I gave readers still digging their way out of debt.

Q: “I hate debt, but I’ve found myself with $10,000 on a credit card due to some unexpected expenses, child care, etc.,” one reader wrote. “We make good salaries and our child-care expenses will be going down soon, but our expenses are still high, leaving us with $500 per month to put toward the credit cards. I don’t want to take two years to pay them off. I want the debt gone now! I know about the 10 percent penalty for early withdrawal on 401(k)s, but I want a fresh start financially. We have about $80,000 in several different 401(k)s, plus we each have a pension and will have a fairly decent inheritance by the time we retire. All of that makes me think that since we’re in our mid-30s, we’re in decent shape for retirement and it might actually be okay to take out the money to pay off our debt now. What do you think?”

Michelle Singletary writes the nationally syndicated personal finance column, “The Color of Money.” View Archive

A: I think you should leave that retirement money alone. Here’s why, based on your own words:

•“I don’t want to take two years to pay them off.”

• “I want the debt gone now!”

• “I know about the 10 percent penalty . . . but I want a fresh start financially.”

It’s your wants that got you into credit card debt. I know you said some of the charges were for child care (although, what did you put on the credit card for child care — the day-care fee?). Anyway, you didn’t get into debt overnight, so take the painful time to slug your way out. Then you will hopefully remember the pain and won’t do it again.

You have only $80,000 in retirement funds between the two of you. That’s a lot of money, and it isn’t. So leave it alone. You say you’re expecting to get an inheritance, but what if that doesn’t happen?

Don’t settle for being in decent shape for retirement. Practice some good financial habits now, such as not withdrawing money from your 401(k) and incurring a penalty. You are just giving the government an extra 10 percent of your money.

Do the work to get out of debt. Then do the work to save for college expenses. In other words, work to get rid of the “I want it now” mentality. You will be much better off for it.

Another reader wanted to know how to repair a credit score without getting credit cards.

Q: “Unwisely, I’ve canceled all my credit cards, and I really don’t want any. What are my options, and how long will it take to go from a [credit] score of 503 to something respectable without getting credit card?”

A: First of all, if you opened those accounts some time ago and paid them off, that history is still positively affecting your credit scores. The history typically remains after you close the accounts. However, if you closed the card accounts with a balance still on them, that could have brought your credit scores down. But what’s done is done.

The best way to improve your credit scores now is to pay your bills on time, as agreed every month. You don’t need to get any additional credit.

Q: “I missed my first credit card payment ever this month. I misread the date, then the baby got sick, etc. It was paid in full two days late. The $25 late fee and $25 in interest make me very mad at myself. I use online bill pay and have now set up an auto-pay to meet at least the minimum in case something happens in the future. How long does this negative mark on my credit report last?”

A: First, call the credit card company. Have someone there look at your payment history. Explain what happened. The company may remove that late payment and credit back the late fee and interest charge.

If you’ve been a good customer, the company might not have reported you late to the bureaus since you quickly rectified the situation. Check and see. If not, a new late payment isn’t good for your credit history. But the good thing about credit scores is that they’re constantly updating, so if you return to your old habits of paying on time, you shouldn’t suffer too much damage to your creditworthiness.

Readers can write to Michelle Singletary c/o The Washington Post, 1150 15th St., N.W., Washington, D.C. 20071. Or by e-mail: singletarym@washpost.com. Personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer’s name, unless a specific request to do otherwise is indicated.

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