Q: I am not sure how to handle my recent situation: We have been living month to month with just enough income to get by. My wife makes about $24,000 a year. I just lost my job a week ago. We have been paying down our credit card debt by paying over the minimum payment required. Our current credit card debt is about $17,000 on about four accounts, none of which we pay interest on yet due to taking advantage of balance transfers with no interest.
We also have a home equity loan with a balance due of about $75,000. Our home is worth about $450,000. I also have a small building lot, valued at about $30,000, which I have for sale. I have $15,000 in a 401(k) and $110,000 (and dropping) in an IRA.
We have no other savings. I will not be able to make my payments on these obligations within a very short period of time. We are not extravagant in our style of living. Do I notify my credit card companies of my job loss and inability to pay until I get a new job and back on my feet? Should I take the hit of penalties and interest and take money from my IRA and 401(k) and pay down these debts? Being 53 years old, I will not have enough years left to build my retirement back to anything substantial. Would you advise trying to sell our home? What advice do you have that would have the least effect on my credit rating? –Keith, South Carolina
A: You are certainly not alone in your predicament, but you do have resources you can use to keep current on your credit card and home equity loan obligations:
- Home equity line. If you can tap into the home equity line, this would be the easiest and lowest-cost way to tide yourself over, even though you will, in effect, be paying off loans with loans.
- Sale of building lot. If lowering the price will quicken the sale, selling the lot will giveyou a small windfall to help pay bills.
- Tapping into retirement accounts. You almost certainly cannot borrow from your 401(k), since you the company is no longer your employer. So you would have to withdraw money from your IRA, which would mean incurring taxes and taking a 10 percent penalty, since you're under age 59½ (although there is a small exception to the penalty for money withdrawn by an unemployed person to pay family medical insurance premiums). Withdrawing from retirement accounts should not be taken lightly. It’s expensive and will impair your retirement plans. On the other hand, it may help to know that you can make a temporary withdrawal from an IRA once a year with no taxes or interest, so long as you reimburse the account within 60 days.
- Sale of your home. This is a last resort, although it may be necessary if you remain unemployed for a long time.
I am hopeful that one of these alternatives will provide some temporary relief so you won’t have to contact the credit card companies to request forbearance. While you have wisely paid more than the minimum on your credit cards in the past, paying only the minimum on your loans until you get back on your feet financially will conserve your resources.
Q: If my current credit is good and my house is foreclosed, what is my rating likely to be after the foreclosure, and how many years is it likely to take to get it back up to reasonable levels? I realize accurate answers are not possible; I'm just looking for ballpark estimates. -Lenn, Virginia
A: You’ll be surprised at how soon you can reestablish your good credit after a foreclosure, even though the foreclosure is noted in your credit rating for at least seven years and most certainly lowers your score considerably. But credit ratings are based on your credit history, so the foreclosure will be factored in along with everything else. If you had a good rating before you fell behind on your mortgage, you might be surprised at how high your credit score may be after you foreclose.
The most important thing to do after a foreclosure is to repair your credit. Make sure all your other accounts are current and paid up. You may try and secure a smaller loan. Making payments on this loan will help you repair your credit. You may even be able to secure another home mortgage at a higher interest rate with a large down payment. Some have managed to secure mortgages just one year after foreclosure, but a few years' wait is more realistic. So a foreclosure is not the end of the world. In fact, it's far from it.
Q: What’s the best way to fix my credit score and get out of debt? -Jonathan, Dayton, Ohio
A: Paying down debt and improving your credit score go hand in glove. Your credit score will benefit from:
Paying your bills on time. The more regularly you pay your bills on time, the better your credit score becomes.
- Getting current on any missed payments.
- Keeping balances low on your credit cards, ideally less than half of the available credit on each card.
- Avoid maxing out your credit cards, even if you pay on time.
Your strategy: Set up a realistic plan for reducing your debt, starting modestly and gradually increasing the amount you put toward the debt. Avoid the temptation to be overly ambitious, because it will be very discouraging if you can't meet your plan. If you stick with your plan and avoid adding more to your debt along the way, your credit score will improve as your debt decreases.
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