Nearly every week I hear from someone desperately in debt.
One recent e-mail from a woman who called herself In Over My Head began: "I am 33 years old and my annual income is about $32,000 to $35,000. I have credit-card debt to the tune of $25,000 (at 15.9 percent interest). I know I was foolish and careless to let myself get this far in debt."
In Over My Head had another concern. She hadn't, until recently, been saving for her retirement. "I am trying to play catch-up," she said.
Like many debtors, the woman was asking for a lifeline. Should she pay off her high credit-card debt and try to save for retirement? Should she seek help from a credit counseling organization? If she were to use one of these groups, would it negatively affect her credit report?
"Please point me in the right direction," she pleaded.
I asked Mark Johannessen, a financial planner based in Virginia, to offer some general advice for this desperate debtor and other consumers who find themselves in way over their heads.
Pay off debt first
"It is not uncommon to feel conflicted about saving for retirement while carrying a high amount of credit-card debt," Johannessen said. "I'm glad she has gotten the message on planning early for retirement, but I think that message works against her here. If it were me, I would put retirement savings out of my mind until the debt issue is under control."
For people with an enormous amount of credit-card debt, paying it off is a sound way to get started on retirement planning, he added.
"If she did nothing but pay the minimum payments on her credit card, the balance will continue to grow by 15.9 percent. Over time that would consume her," Johannessen said. For example, if she took the money that would be used to pay down the credit-card debt and invested it in a large-company mutual fund, she might get a return, over the long term, of about 11 percent (average annualized return of large-company stocks from 1925 to 2000).
"Depending on the family's tax bracket, the after-tax return on that money might be only 8 to 9 percent," Johannessen said.
Don't turn to creditor
In Over My Head also wanted to know if it was a good idea to sign up with an agency that helps consumers negotiate with creditors to eliminate or lower the interest charged on their credit cards.
Even though she is carrying a $25,000 balance on her credit cards, she said she hasn't missed any payments. Therefore her credit rating is still good. Granted, she's been able to keep up her credit-card payments because her husband uses his income to pay the major household expenses, such as their mortgage. Still, she said, it's getting harder to manage the credit-card debt.
Given her situation, Johannessen said, turning her debt over to be managed by one of the credit counseling operations would probably not be a wise move.
"A person with good credit using the services of a consumer credit counseling service would negatively impact their credit," he said.
In the case of In Over My Head, her creditor might report to the credit bureaus that she is paying her debt under a special arrangement. Johannessen said such a status could nick her credit rating, and as a result she might be kicked up to a higher credit-risk category.
Johannessen advises that In Over My Head take a serious look at what income is coming in and what expenses have to be paid. Whatever is left over should be used to aggressively pay down the credit-card debt.
She's not alone
"I feel terrible and stupid about this whole situation," wrote In Over My Head. "I can imagine what you are saying to yourself as you are reading this."
I was saying, stop beating yourself up. Don't worry about what others will think. Many of your neighbors, co-workers, friends or family members are probably wrestling with their own debt demons.
Myvesta.org, a nonprofit debt counseling organization, has seen the average credit-card debt of its most serious clients balloon from $17,800 in 2000 to $48,200 in 2001. The average American family is paying about a $1,100 a year in interest on credit cards, according to Cardweb.com.
"In the past year many people have pared down expenses in a withering economy, but we're seeing others do just the opposite," noted Steve Rhode, president and co-founder of Myvesta.org. "For some people, shopping adds some normalcy to life and helps them feel better in these uncertain times. It can also leave a person or family in financial ruin."
But just remember: No matter how bad your situation, it's never too late to stop charging on your credit cards and take charge of your debt problem.