Child's Debt Consolidation

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Mettaman
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Joined: Sat Jun 27, 2015 12:31 pm

Child's Debt Consolidation

Post by Mettaman » Fri Apr 21, 2017 7:33 am

Hi! My daughter works for a non-profit food bank. Her salary is low and she has rung up a $7K credit card debt over 2 years to cover some living expenses. She has an emergency fund that can pay off the debt. She's gotten a roommate which will help lower the apartment rent so she can stop using the credit card for living expenses.

I've told my daughter to pay off the credit card from her emergency fund and stop paying the exorbitant interest. She's been enticed to transfer the balance to another card that won't charge interest for 15 months. Highly unlikely she can pay off the debt in 15 months going this route.

Advice welcome on how to manage this debt. Thanks!

Dottie57
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Re: Child's Debt Consolidation

Post by Dottie57 » Fri Apr 21, 2017 8:19 am

Mettaman wrote:Hi! My daughter works for a non-profit food bank. Her salary is low and she has rung up a $7K credit card debt over 2 years to cover some living expenses. She has an emergency fund that can pay off the debt. She's gotten a roommate which will help lower the apartment rent so she can stop using the credit card for living expenses.

I've told my daughter to pay off the credit card from her emergency fund and stop paying the exorbitant interest. She's been enticed to transfer the balance to another card that won't charge interest for 15 months. Highly unlikely she can pay off the debt in 15 months going this route.

Advice welcome on how to manage this debt. Thanks!
First thing is to emphasize that you only use credit cards for items you can pay for by the time you receive the bill. Spending future income is not smart whether there is interest or not. You still have to pay back the what you spent.

Second, if the food bank does not pay enough , a second job should be taken so current expenses can be paid from current income. Or get a better paying first job.

Third, she needs to know where her money is going and she should make a good effort to reduce expenses.

If the job(s) situation does not change, use emergency funds. Don't bail her out. She won't learn anything.

Good luck.

ryman554
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Re: Child's Debt Consolidation

Post by ryman554 » Fri Apr 21, 2017 8:29 am

Agreed, +1 to the reply above.

Get her to listen to the Dave Ramsey show and/or gift her his book/course or something.

It's got to come from her, otherwise the behaviour will repeat. It's not easy watching a child go down a dangerous path...

Wellfleet
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Re: Child's Debt Consolidation

Post by Wellfleet » Fri Apr 21, 2017 8:46 am

You might consider a carrot if you would like to help financially like matching a ROTH contribution or something like that.

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flamesabers
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Re: Child's Debt Consolidation

Post by flamesabers » Fri Apr 21, 2017 10:11 am

I also agree with her using her emergency fund to pay off her credit card debt. She shouldn't be getting anymore credit cards since she is already unable to pay in full every month.

Does she have a budget? That could help her determine where she needs to cut expenses so she can live within her means or decide if she needs to get a second job to pay her bills.

Mettaman
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Re: Child's Debt Consolidation

Post by Mettaman » Mon Apr 24, 2017 10:25 am

Thanks everyone for the advice. Much appreciated. She's paying the credit card debt from emergency fund, starting to budget and cutting expenses.

Dottie57
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Re: Child's Debt Consolidation

Post by Dottie57 » Mon Apr 24, 2017 10:29 am

Mettaman wrote:Thanks everyone for the advice. Much appreciated. She's paying the credit card debt from emergency fund, starting to budget and cutting expenses.
Once more thing. Reduction in expenses = building up her emergency fund. This is a must do!

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BL
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Re: Child's Debt Consolidation

Post by BL » Mon Apr 24, 2017 12:08 pm

Be aware that using a credit card that has debt carried on it means she is also paying high interest on her current purchases. Never use a card that is not fully paid off regularly.

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dm200
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Re: Child's Debt Consolidation

Post by dm200 » Mon Apr 24, 2017 1:36 pm

Mettaman wrote:Hi! My daughter works for a non-profit food bank. Her salary is low and she has rung up a $7K credit card debt over 2 years to cover some living expenses. She has an emergency fund that can pay off the debt. She's gotten a roommate which will help lower the apartment rent so she can stop using the credit card for living expenses.
I've told my daughter to pay off the credit card from her emergency fund and stop paying the exorbitant interest. She's been enticed to transfer the balance to another card that won't charge interest for 15 months. Highly unlikely she can pay off the debt in 15 months going this route.
Advice welcome on how to manage this debt. Thanks!
One action that can work (I have seen it work many times):

1. Do NOT cosign a debt consolidation loan for her!

2. DO: Go to a credit union where you both are (or can be members)

3. DEPOSIT $7,000 in savings or certificate

4. Have her join the credit union, apply for s "share secured" loan with your $7,000 as pledged. Have her arrange for a payroll deduction or automatic loan payment transfer.

5. She is more likely to pay this kind of loan to a credit union than a personal loan from you.

5. Agree to pledge your savings of $7,000. As she pays down the loan, your available savings will be unfrozen.

Qwertykid18
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Re: Child's Debt Consolidation

Post by Qwertykid18 » Mon Apr 24, 2017 2:25 pm

Two words: Dave Ramsey

qwop
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Re: Child's Debt Consolidation

Post by qwop » Wed May 17, 2017 9:11 pm

First thing's first: don't let her get that second card. 0% interest rates and transfer offers are mighty tempting, but if she can't pay the total off within the new card's interest free period, she's just digging herself a deeper debt hole. It might *seem* like the best idea in the short-term, but it'll only make things worse.

Given this, I'd look into some form of debt consolidation loan. As dm200 mentions, preferably from a bank or credit union that you're already a member of (they usually offer better deals to members). If not, then just do some hunting and find the lowest possible rate you can - there's bound to be some good offers out there.

As others have suggested, getting her onto some go-to money experts like Dave Ramsey (https://www.daveramsey.com/), or throwing some debt related guides or resources her way (this one on debts is a good start), is probably her best bet in the long run. Paying off all of those debts won't come to much if she just ends up spending beyond her means again :P

Some other quick ideas off the top of my head:
  • Get a budget together. It makes the world of difference.
  • Look at cutting expenses. No, she doesn't need to skip the coffees and Avo on toast, but an unused Netflix or Spotify sub can drain spare cash pretty fast.
  • Get a second job or start turning hobbies into money makers.
Hope that helps - best of luck!

gr7070
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Re: Child's Debt Consolidation

Post by gr7070 » Thu May 18, 2017 12:23 am

I think the debt consolidation loan is a terrible idea. What usually happens is they just free up credit cards enabling them to add a lot more debt.

Maybe if she's proven *after* 15 months to have gotten on track, living within her means, and paying down her debt. But only after she's had some extended success!

Budget. Dave Ramsey could be helpful.

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8foot7
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Re: Child's Debt Consolidation

Post by 8foot7 » Thu May 18, 2017 9:15 am

What is the reasoning for not taking the new 0% card and then paying 7000 in equal payments over 15 months from the emergency fund? Then she's not depleting her entire cash reserve at one time but absent an emergency she is able to pay off the 7k with no additional interest charges. Then she can rebuild the cash reserve once debt free.

miamivice
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Re: Child's Debt Consolidation

Post by miamivice » Thu May 18, 2017 10:27 am

I just want to point out that the daughter is an adult, and can use credit cards and manage money according to her desires. That's part of the freedom we have in this country. And the daughter isn't asking for advice on here.

Some advice like "you don't use a credit card for anything you can't pay off when the bill comes" is solid advice but many, many people choose to use credit cards in a different manner, and that is perfectly fine and reasonable.

As parents of adult children, it's not our job to tell them how to live their life. Our children need to figure that part out, based on their goals and desires.

We Bogleheads have an idea that saving money is the best thing ever. But the daughter might have a different goal in her life.....(and probably does if she works at a food bank).

seity
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Re: Child's Debt Consolidation

Post by seity » Thu May 18, 2017 3:32 pm

8foot7 wrote:What is the reasoning for not taking the new 0% card and then paying 7000 in equal payments over 15 months from the emergency fund? Then she's not depleting her entire cash reserve at one time but absent an emergency she is able to pay off the 7k with no additional interest charges. Then she can rebuild the cash reserve once debt free.
This is exactly what I was thinking.
If she's actually lowered her monthly expenses and budgeting within her income level, she'll even be 'replenishing' that cash reserve as she goes.

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