Credit Card Interest

[BOB W]

When a client comes to me to talk about refinancing their home to pay off those high interest credit cards I explain the cost factor of extending those credit cards over 30 years and show that it is just as expensive refinancing credit card debt into their mortgage.

I offer two other methods to help solve the problem. The first is find those zero interest credit cards offers for 6-9 months and transfer to them. Pay as much as you can monthly and when the period is up transfer to another credit card with zero interest for its period. The second choice is a home equity "line of credit". Here you pay interest and the interest is tax deductible. Like the zero credit cards, you must pay as much as possible monthly to reduce the outstanding balance. (I am not looking to give the client an easy short term out. They will never learn any lesson from over spending. )

I think most people have been under the concept "do what is tax wise for the long and short term", while I follow "do what is cash flow wise for the long term". Tax savings will never accomplish a good debt free life style when you get older.

Yes, mortgages are a way of life but good cash flow management should be striving to payoff those mortgages as soon as posible. When interest rate go down one should be thinking about refinancing a 30 yr mortgage to a 20 yr mortgage or a 20yr to a 15yr or 10 yr.

Doing any of the above will put money in the bank when you reach 50 and above age.

Note: The concept of "get a tax deduction to save money" is a carryover from the days when high income individuals where in the 70% tax bracket. But when congress changes the tax bracket to below 50% it made all deduction worth less than what we spent to get the deduction. I agree that if a person HAS to spend money and it can be set up to be tax deductible, it will cause a cash flow savings.

What do you think????

[Armando Beaujolais]

"I offer two other methods to help solve the problem. The first is find those zero interest credit cards offers for 6-9 months and transfer to them. Pay as much as you can monthly and when the period is up transfer to another credit card with zero interest for its period."

That's great in theory, but in practicality you're giving the credit-challenged a bomb and saying "make sure you trade this in on another bomb before it goes off."

Why are the zero interest credit cards in business? That's right. Because most people don't pay off the balance in the alloted time. If the person rotated the debt periodically, yes, it's a great way to eliminate interest charges. However, if the person had that much discipline to begin with, they wouldn't be in the trouble they're in.

It's exactly the same as the furniture store that will sell you an expensive bedroom set for "0% Interest Until 2006!" I used to work in retail, and the finance company said they converted over 70% of those no interest deals into high interest debt which included interest for the supposed no interest period.

Another problem is that the debt you put on a zero interest credit card is just a one time shot. All new purchases are subject to the exhorbitant interest rates that keep those cards in business. Any new purchases have to be paid off first, at the high interest rate. Is the consumer going to have enough discipline to keep from putting new charges on the card?

If the strategy works, it's great. But it's fraught with peril. Lots of big traps that can blow up in the consumer's face and put them in twice the trouble they were in before.

[BOB W]

CC Debt

I think you are missing the point, these are for people that are generally concerned with debt reduction.

Please offer an alternative for someone looking to reduce debt.....

[Armando Beaujolais]

"I think you are missing the point, these are for people that are generally concerned with debt reduction."

You're suggestion was in the context of advising clients who are considering hocking their house to pay off "high interest credit cards." I took this to mean something akin to a serious credit problem rather than general planning advice. I've used the no-interest credit card shuffle myself, and it works great and saves a lot of money in interest. However, it took a lot of diligence and action to stay on top of it. It takes disclipline to keep from getting burned. I just don't have confidence in the financial discipline of someone who got themselves into a situation where they're going to take out a mortgage to pay their credit cards.

"Please offer an alternative for someone looking to reduce debt....."

Monthly budgeting. Show people how much spendable income they're bringing in every month, and show them what they are spending. The folks I've counseled on this issue have had high credit card debt, and have been in situations where monthly expenses equal or exceed their monthly income. They've used credit cards as extra income, not payment deferral or planning. Sometimes when they see the figures, see the trend, and see where they're headed, they change the way they think about how they spend money. Sometimes not.

I think the best approach is the monthly, or by paycheck illustration. With nearly all the folks in trouble over credit card debt, it's most important to change attitude and behavior. The folks need pressure on them this week to do that, not looking at a year or longer picture. If they mortgage all their credit card debt away, whew, the pressure's off. Big limits are back on the charge cards. Let's go on the Caribbean Cruise we've been deserving for so long.

[BOB W]

I agree....

....we can't solve everyones' problems. Like other sicknesses, spending is a illness. I give the info to my clients and they do what they want. I never claim to be the answer for their problem, but I do claim to give the best direction for them to go.

Unlike mortgage companies, who want to solve credit card problems by refinancing one's home, as if it is the ultimate solution, or when they say "get your equity out of your home and take that needed vacation", etc.......these options are self serving to the mortgage companies and are in poor taste to the general public, which believe such goobolie-gook.

Another answer that I give, especially to the Self Employed, is earn more money to solve your short term problem, but keep the debt free objective in mind at all times.

[Bees Knees]

Debt free goals

I am a strong advocate of setting a debt free goal for people as they approach middle age. Yes, in this country, everyone needs a mortgage at first to own a home. But that does not mean everyone has to mortgage to the hilt and have the highest possible square footage for their earning power. Nor does it mean you have to have a mortgage for the rest of your life. Tax deductions are only a small portion of sound financial planning. Cash flow trumps tax deductions. If it costs $100 to save $30 in taxes, it still cost you $70.

Consider this example: You currently pay 5% on a $100,000 mortgage. That is $5,000 in mortgage interest. You say, “but you get to deduct that $5,000, right?” Maybe. What about the $10,000 standard deduction for married people? If that $5,000 in interest only bumped your itemized deductions to $11,000, you really only were able to deduct $1,000 of that interest. Let’s say you are in a 30% federal and state tax bracket. The cost of that $5,000 per year in interest now only saved you $300 in taxes.

But you might say, “well I can get 10% in the stock market, so I can make $10,000 on something that only cost me $5,000.”

My answer to that is 9-11. I lost over 60% of the value of all my investments after 9-11. Some have yet to come back to even. But if those investments were invested in paying off my $100,000 mortgage debt, that’s $5,000 guaranteed savings that not even the next 9-11 would take away. Even if the value of my house should drop after a disaster, I still would not have to make that $5,000 interest payment each year. Tell me any other investment in the world that can guarantee that result.

[BOB W]

Exactly.....

...my point. Tax deductions mean you are spending more than you are saving and you may not be getting all of the savings you think you are. Very high income t/p lose even more of what they thought they were getting with a mortgage deduction.

Bees Knees, as usual, you give good examples.........