Debt Consolidation Question?

I received the following e-mail from one of my readers;

David,

I really need your assistance if you can please.

I aim to get to one of the clinics in Melbourne in June and am grateful for the tips I have been receiving to date.

I was hoping you could give me some basic advice on a problem that I need to address now.

My Income is $20,000.00

My husbands income is now $90,000.00 which dropped dramatically unexpectedly from $135,000.00 late last year.

Our home is valued at $360,000.00 of which we have a mortgage of $183,000.00 (current interest rate with NAB 8.48% and pay $400.00 per week.)

We have the following credit cards:

CREDIT CARD NAME                OUTSTANDING BALANCE        INTEREST RATE PA

Citibank clear card:                    $5500.00                                   10.85% pa

NAB gold Visa:                          $5650.00                                   11.25%

Coles Myer Source                    $2250.00                                  19.75%

GE Credit:                                 $4450.00                                   0.00%  until JAN 2010 

My husband was paid lump sum commissions and we always just paid these cards off with those payments so was never too concerned about them.

We suddenly no longer receive these payments and have to pay these cards in regular weekly/monthly installments.

Am I better off to consolidate them all (except the interest free GE card) into my home loan and pay our current home loan interest rate (8.48%) or is there a better way.

I would appreciate any advice as I don’t know quite what to do.

Andrea

Here is my reply.

Andrea,

I have been asked questions like this many times in the past. I have actually placed tools on my web-site to help people work out their best debt reduction options. If you go to the DebtBuster page and use the calculator there you can work out the most efficient way to repay the Credit Cards using the 'payment snowball method'.

The question of Refinancing is always a tricky one in my books. Should you or shouldn't you?

If you do, you will have initial lower repayments but interest costs will go up if you are not careful. Let me explain;

Your current loan will take just over 16 years to pay off and will cost about $155,000 in interest.

If you add the Credit Cards that you suggested, the loan will rise to $196400 and the repayment will go up to $430 and interest total to $165,000 if you keep the period the same as the current loan. That is, $10,000 interest for the privilege of taking 16 years to pay off the Credit Card part of the debt!

If you keep the current mortgage and pay the Credit Cards out in say 4 years, you will have approx $70 a week to pay on those Credit Cards but will only pay about $4000 in interest over that time. Of course you have a higher weekly commitment.

The real winning situation would be if you combined the Mortgage and the Credit Card repayments and refinanced the debts into the one loan of $196,400. You would knock the whole lot off in under 14yrs and save roughly $22,000 in interest.

NOW THE 'GE' FINANCE PROBLEM.

I have not included this in the above calculations because you suggested you wanted to keep it out of the refinance equation. Are you aware that you MUST pay something like $200 a month off this debt or you are basically 'stuffed'!

If you still owe even just $1 of this debt on the date the interest free period expires, you will suddenly owe interest at something like 25% to 30% charged back to the first day you borrowed the money? You might want to consider the ramifications of NOT refinancing this debt if you do refinance the others. It is the most dangerous debt you have!

I hope this helps. 

Regards
David Wright

Some other comments that apply to this issue:-

The other common problem I see in the above situation is how human nature has caused this problem. Most of us live as if nothing bad could ever happen to us. Losing $45,000 p.a. income would be a very rude shock to most people if they have committed it all to repayments.

Saving to purchase things would have left these people in a very much better position. i.e. Save up - Make a purchase, Save up - make a purchase, as opposed to the 'Make a purchase - pay it off' scenario!

A lot of the people reading this would be very happy to earn $90,000 p.a. and would imagine that it would solve their current financial problems. Isn't it strange how it doesn't matter how much you earn you quickly learn how to spend it all and it is never enough!