Money Watch, a personal finance column that runs every Saturday, features a financial planner from the National Association of Personal Financial Advisors answering reader questions about saving, protecting and growing your money. To submit a question, e-mail USA TODAY personal finance reporter Christine Dugas at: firstname.lastname@example.org
Q: I owe $45,000 to six credit cards. I pay a total of over $1,000 a month. What is the best way to manage this debt? Can I get a five-year loan so there is just one payment?
A: Unfortunately, there is no quick fix to get out of credit card debt. It is important to explore all the pros and cons of the debt consolidation options and stay clear of quick-fix schemes.
Here are some ways you may be able to get a five-year loan to consolidate your debt.
-- A secured personal loan. Banks, credit unions and other professional lenders offer this type of loan. However, it requires the backing of some type of collateral. Secured loans are often used to purchase an item of significant value, such as a car. Secured personal loan rates can vary substantially. The rates generally depend on a number of factors, such as the collateral and your credit score.
-- An unsecured personal loan. This type of loan does not require collateral. Unsecured personal loans can be found online, and these loans can provide borrowers with fast cash. However, low interest rates are generally only available to borrowers with excellent credit scores. For borrowers with low credit scores, the interest rates will be higher and the loan can be more difficult to obtain.
-- A home equity loan or home equity line of credit. If you own your home, and you have built up some equity, you may be eligible to take out a home equity loan or home equity line of credit. The funds would be used to pay off your credit cards, and you would be left making just one payment to your lender. As an additional bonus, the interest from your home equity line is tax deductible.
If a loan is not an option, here are some steps to manage your debt:
1. Write it down. Get a visual handle on where you are with your debt. List each of your credit card balances with the current Interest rate, rate-change date, final interest rate, minimum payment, monthly payment and due date. You can't fix it until you face it.
2. Wipe out the smallest balances first. Calculate how much is available each month to pay toward your credit cards. Pay the smallest balances off first and pay the minimum on the rest of the cards. Although you may save some money tackling the highest-rate cards first, the mental relief that comes with paying off each card far outweighs saving a few dollars.
3. Consolidate to a 0% card. Check online to see if any 0% annual fees and 0% transfer fees are available. Stay away from cards that offer a 0% APR but still require a transfer fee. In the end, transfer fees can wipe out the benefit of 0% annual fees. Right now, Chase is offering the Slate Visa with a 0% transfer fee and 0% APR for 15 months. This is a great opportunity to pay down that debt!
4. Resist the urge to tap your retirement account. Distributions (taking money outright) from a 401(k) or 403(b) are taxed at ordinary income, plus a 10% penalty if you are under 59 ½. If you take out a retirement loan and later leave your job or get laid off, many plans require you to repay the money within 60 days or it's considered a distribution. Tackle what caused the original credit card debt in the first place, or you could find yourself with new credit card balances and a depleted retirement account!
5. Know your cash flow. Know what your fixed expenses are such as gas, food and utilities and separate those from discretionary spending, such as dining out. Learn to live within your means. Using a debit card allows money to come out of your checking account real time. If you've spent your leftover money for the month, that's it. Keep one low-interest-rate credit card in your wallet for emergencies only.
6. Start an emergency fund. Part of the reason we get into credit card debt is because we don't save. Start an automatic transfer each month into a savings account. An emergency fund holding six months worth of expenses may seem daunting, but once you get going, you'll be surprised how fast it accumulates. Once that is funded, the rest goes into a separate savings account for all those extras you have patiently waited to buy.
A reputable non-profit credit counseling agency can be found by going to the NFCC, National Foundation for Credit Counseling, at www.nfcc.org. This type of agency can help you create a budget as well as negotiate with creditors on your behalf. And if you need help understanding your cash flow, creating a budget or managing your debt, you also can find a NAPFA Fee-Only Certified Financial Planner professional at www.napfa.org.
Kelly Trageser, NAPFA-Registered Financial Advisor
Sea Clear Financial Planning, Sea Girt, N.J.