Question: We have about $22,000 in the bank. Should we pay off all our credit card debt (approximately $21,000) and be debt-free? Or should we hold it for the mortgage and an emergency fund? I have been impacted by COVID-19, and now my pay is reduced. Our combined income is less than $100,000, and we sometimes struggle to pay the mortgage.
– Lolita in Georgia
Howard Dvorkin CPA responds…
In any other year, this is an easy answer – because it’s simply a math problem. Let’s say your $21,000 in credit card balances are charging you 15 percent interest. (WalletHub and CreditCards.com say the national average is around 16 percent right now, but it changes all the time.)
At 15 percent, that means you’re paying $3,150 a month in interest. You don’t say what the interest rate is in your mortgage, but pre-pandemic, the average rate was around 5 percent. So, it just makes sense to pay off those credit cards as soon as possible, then plow those savings into other debts and even an emergency fund.
Of course, this is anything but a typical year, so the standard advice doesn’t always apply. COVID-19 has already reduced your income, and you need to seriously plan for what happens if that gets even worse. What will you do if you lose more or even all of your income?
Because the pandemic is so serious, there are actually opportunities to delay paying some bills, as both the government and private sector try to keep their citizens and customers from going broke. So before you decide what to do with your $21,000 windfall, explore these options first.
Credit card debt help
Early into the pandemic, credit card issuers were offering generous programs that waived late fees, slashed interest rates, and even allowed you to skip payments. These were always intended to be temporary, and each card offered different breaks. Some have scaled way back, while others have been consistent throughout the pandemic.
So, your first move is to take out your credit cards, flip them over, and call the number on the back. Explain that you’ve lost income and need to know about any payment options. This is one time that a phone call works better than an Internet search since credit card issuers aren’t sharing a lot of details online.
Mortgage help
If you have trouble making your mortgage payments, your lender will probably try to help – because, in some ways, they have no choice. For example, back in March, Bank of America announced, “clients can request to defer payments, with payments added to the end of the loan term.” Of course, all you’ve done is delay the inevitable, but it can still help you out of a bind right now.
Even better, the federal CARES Act – which passed back in March – still has some provisions in effect that can help you. If you have a federally backed or GSE mortgage, “you have a right to request and obtain a forbearance for up to 180 days,” explains the Consumer Finance Protection Bureau. “You also have the right to request and obtain an extension for up to another 180 days (for a total of up to 360 days).”
Here’s the catch: “Some federally backed mortgages have a December 31, 2020, deadline for requesting an initial forbearance. If you are facing financial hardships, you should ask for forbearance immediately, so you don’t lose that right.”
What you should do
It’s impossible to say what additional aid or relief programs the federal government may offer in 2021. However, you can call Debt.com and get free expert advice that might answer questions like those posed by Lolita above.
For example, Debt.com can introduce you to a certified credit counselor who can give you a free debt analysis. With that, it will be easier to determine exactly what you should do with any extra money.
Without those details, however, I can’t make a definitive decision. My hope is that you can pay down a huge chunk of your credit cards – obviously, the higher-interest cards first – and still have enough to set aside some for an emergency fund. Then, perhaps, you can contact your lenders to catch a break on the rest of what you owe. With some luck, you’ll emerge from this awful pandemic with both your health and finances thriving.
