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Too Much Credit Can Cost

Problem:
Young couples can find themselves with too much outstanding credit and little cash for savings or emergencies. Without knowing the whole financial picture and making a plan they have no direction and no goals to help them plan.

Response:
Young couple with children came in for a budget counseling. They were considering getting a debt consolidation loan and wanted to know if they really could save money by consolidating their debts.

First, we identified all of their debts. This young couple had many thousands of dollars in debt. The largest was a hospital bill, then several secured loans, and a credit card. This couple wanted to combine all of the secured loans, credit card, and small bills to a mortgage loan and continue to pay on the hospital bill as they had previous payment arrangements.

Next, we entered the loan information into the Power Pay computer program to analyze how long it would take to pay off their bills and to find out if this new loan would save them money in interest charges.

Impact:
The results of the Power Pay program really surprised this couple. Their payments to the current debt was going to take over 99 years to pay off! This is due to the low payments on the high hospital bill. If we combined all other debts into a new loan it would actually cost them additional money. The other concern was they were already very over extended and after explaining their debt to income ratio and their lack of savings or emergency funds, they decided they really needed to concentrate on paying off their debt. I met with this couple 6 months later and they were making progress on their debt. They had applied for financial assistance on their hospital bill and they combined a couple of their loans that were at the same lender for a reduced interest rate. They are making progress towards their debt. They were able to see where they were financially and learn how much future income was already spent in debt. This really helped this young couple to curb their consumerism. They are no longer looking at want items and focusing on their needs.

Contact: 
Mary Snow
Family Resource Management Specialist
Cherokee County Extension
209 Centennial Dr. Ste A
Cherokee IA  51012
Phone 712-225-6196; Fax  712-225-3173
Email msnow@iastate.edu

 

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Last update: February 9, 2006  
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