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Debt, credit, layoffs: Your questions answered

If you have questions about your money in today's economy, you're not alone. Here, TODAY personal finance editor Jean Chatzky tackles reader concerns about a few financially sticky situations.
/ Source: TODAY contributor

If you have questions about your money in today's economy, you're not alone. Here, TODAY personal finance editor Jean Chatzky tackles reader concerns about a few financially sticky situations.

Q: My husband and I are about $130,000 in debt, which includes the house and two vehicles but primarily $70,000 in credit card debt and one small student loan. Right now with the debt we are carrying we can't get the bigger home we need. We are in a catch-22 situation and I don't know which is the best direction to take. — Kathy, Bettendorf, Iowa

A: Kathy — sometimes I think people need to hear answers they already know, and I think you're one of those people. You cannot afford to buy a new, bigger house right now. Plus, my guess is your credit scores aren't in great shape so getting a new mortgage would be a battle. You need to work on that debt — not the house debt or the car debt, since you can pay that off over time, but the credit card debt.

Here's what I'd do: 1) Work on clearing some space in that too-tight house by selling everything you don't really need. If you come up with items that aren't salable, list them on and give them away. Clearing the clutter will clear your mind.

2) Add an hour of work a day. If you both increased your hours — if you're able to do that — by one hour per day, you'd bring in an extra $20 (roughly) after taxes. That's an extra $5K a year to put toward those credit cards.

3) Call all your credit card companies to see if they'll lower your interest rates. Then work the debts from highest interest rates to low. That way you'll pay the cards that are costing you the most first. When you finish paying each one off, put it in a drawer and stop using it, unless it has an annual fee — in which case cancel it.

4) Track your spending. This is the only proven way to notice the little ways you're spending and find additional money in your budget.

Q: We are $100,000 in debt. I have lost two jobs due to layoffs. American Express has sent us to collections and we are just drowning. I am looking for a full-time job and a couple of part-time jobs for evenings and weekends to try to make a dent in the debt. Should I contact a debt or credit counselor? — Lela, Nashville, Tenn.

A: Yes, Lela — you need to contact a credit counselor and perhaps a bankruptcy attorney.  The difference between your situation and Kathy's is that she and her husband have a steady income. Particularly in this economy, that makes all the difference in the world. I'd start with the NFCC, the National Foundation for Credit Counseling. Going through their intake process will let you know whether you can make the payments on a debt management plan or need to file bankruptcy.

Q: I have been dating a 52-year-old man who is still living with his mom. He mostly works three-hour shifts. I work full-time. He's very nice but is all talk and no action. He dreams of owning his own business, going to grad school and traveling. The question in my mind is: with what money? I can't help but wonder if his mom supports him financially. Would it be inappropriate to ask him? If our relationship turns into a long-term commitment, how could he possibly support me? — Melody, St. Louis

A: Melody — I have a couple of thoughts. First, my guess is this man isn't thinking about supporting you at all. Why would he? You're not only supporting yourself right now, you're outearning him — as 30 to 40 percent of women outearn their spouses these days. In fact, what worries me is that he may have the opposite notion — he may be thinking that you could support him. And, as his mother is very likely nearing 80, is probably looking for that next source of support. I'd sit him down and ask — in a very nice way — the following questions.

1) Where does he see this relationship going? If in his mind it's just fine to have dinner a few nights a week, then the rest of the conversation is unnecessary.

2) If he says he's thinking marriage/long-term/etc, then you need to ask: Where does he see you living? Who owns that house, him or his mom? How does he support himself on those three-hour shifts? And, how would he envision the finances working in your marriage? Tell him money was an issue in your first marriage — you have a policy of putting all your cards on the table and expect no less from him. You may even want to consider a simple prenup.

Q: My husband was laid off from his job. Soon our severance package will be over. We have our house for sale, but with the housing market the way it is, who knows when it will sell? Someone recommended that we do a short sale on our home. What is a short sale and how will it affect our credit? — Kim, Seattle

A: A short sale is when you sell your house for less than due on the mortgage — and the lender accepts that amount. A lender will sometimes do this to avoid foreclosure. It sounds nice and clean and easy — but it's not as easy as it sounds. 

The mortgage has to be in or near default. Yours doesn't sound as if it is. You also have to show why you can't pay the balance on the loan — your should be able to make that case.  The lender will also want to see that you have no assets, your retirement account balances may get in the way of that. Lastly, a short sale will show up on your credit report and credit score — it's not as much of a blemish as a foreclosure, but it's close. 

Instead, I'd try two other things: Call your lender and see if you can work out a break in your payment schedule, explaining what has happened in your life. This may give you the time you need to get ahead and get a job. Second, reduce the sale price on your house to the point where you start to get nibbles and hopefully an offer. No, you might not get what you paid — but you may come out ahead in terms of your credit and your future.Q: I will be retiring soon. I have no debt, I will continue to receive Social Security and alimony, but don't know if it will cover my expenses. I have investments in the stock market and a 401(k), but the value of most funds is dropping. I could get a reverse mortgage or liquidate my mutual funds and purchase an annuity. I have heard you must be very cautious putting money in annuities. What is your advice? — Barbara, Reston, Va.

A: Barbara, this is the stage of your life where you want to stop taking as many risks with your money, in general, and lock into some sort of income stream. Both immediate annuities and a reverse mortgage could provide that for you.

But reverse mortgages tend to have higher fees than good immediate annuities — and they're really best for people who know they want to stay in their home FOREVER. I'd look at immediate annuities first. An immediate annuity is purchased with a lump sum of your retirement funds and then provides a guaranteed stream of income for you for life.

How much you should annuitize depends on how much income you think you need. Some people feel comfortable covering much of their basic living expenses with Social Security and other sources of guaranteed income, like a pension or annuity payments. They can then tap other assets like mutual funds, stocks and bonds for discretionary expenses like traveling and entertainment and emergencies. By keeping some money in stocks — which I know seems worrisome now but is the best bet long-term — you'll have the best shot at the long-term growth you need to keep your purchasing power ahead of inflation.

I used Money magazine's IncomeForLife calculator to run some annuity scenarios for you, but of course, you may be able to do better by shopping around.

  • If you annuitized $50,000 you'd get a monthly payment of $373.
  • If you annuitized $75,000 you'd get a monthly payment of $560.
  • If you annuitized $100,000 you'd get a monthly payment of $746.

Q: How does canceling a credit card affect your credit rating? I really don't want to hold onto a particular card but I am afraid canceling it will negatively affect my overall credit rating. — Kenneth, Queensbury, N.Y.

A:  Kenneth — it is true (not urban legend) that canceling credit cards dings your credit score. That's because one important part of your credit score (about one-third) is something called your utilization ratio. It's the amount you have borrowed divided by the amount of credit you have available to you. By canceling a card, you shrink your credit lines (the denominator) so the ratio takes a hit.

If you really want to get rid of this card, however — and there are lots of reasons you may want to, including annual fees, high interest rates, etc. — do the following: Make sure that you are not planning to apply for a big loan on a car or a house in the next six months. Then, pay down a little bit of debt (the numerator) at about the same time you're canceling the card. Don't cancel any other cards for the next few months and it should be a wash.
Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site,