Budget Rehab: How to Stop Paying Only Interest and Make Real Progress on Credit Card Debt

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1:57Elizabeth Ayoola:You're making payments, but the balance is barely moving. That's where today's listener is with$25 ,000 in debt and a big question. How do I pay it down and get ahead?

2:11Sean Pyles:Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles.

2:18Elizabeth Ayoola:And I'm Elizabeth Ayola. Now we have another listener question today. We heard from the great Brian that you guys love listener questions. This episode's one comes from Jessica, and she's actually joining us today. And she has a question about debt recovery. So we're going to be doing a little bit of a debt rehab episode and looking at her budget and also looking at her debt pay down options. Hello, Jessica. Hi, thanks for having me, guys.

2:43Sean Pyles:Jessica, welcome to Smart Money. So we like to start often with an icebreaker. since you live in California, where I used to live in the Bay Area, I would love to hear what's maybe your favorite thing about living in California. Oh, I am a Bay Area girl through and through. So I would probably have to say all of the diversity that we have, all of the great food. I can eat Burmese one day and eat Mexican the next day and Thai the next day. That's the really cool thing about living up here, I do.

3:15Elizabeth Ayoola:And are you a native? How long have you been there? I am. I'm born and raised Bay Area. My family, everybody's here. Tell us a bit about your family structure right now. What's going on? Do you have kids? Tell us a bit about that. I have two daughters. They are seven and four and they are really, really fun to play with. And they are really, really expensive, but they're fun. My seven year old's in the first grade and she's really, really smart and she has a lot of friends. and I'm really proud of her because she's the best friend that you could ever ask for. She's sweet. My four-year-old is just coming out of her shell and she's got so many friends and she's, she used to be a little shy.

3:57Now she's out singing and making new friends and she's going to TK in August. So I'm really proud of her and that I, I got divorced two years ago and now I am with my partner who I love very much and we've been friends for almost 20 years so kind of long time set in stone it was meant to be so um and then I have a cat and a dog and my cat is crazy

4:24Sean Pyles:Sean can relate I can relate yeah my cat he has a mind of his own he really likes to get things his way and if he doesn't he'll let you know by biting you oh my god I'm not coming over Sean what you will you will definitely come over when you're in Portland I will make it happen oh my god

4:38Elizabeth Ayoola:Oh, my God. All right, Jessica, let's get into your finances. Thanks for giving us a little bit of background there. You wrote to us because you wanted to talk about strategies for your debt. So let's talk about how much debt that you currently have. So I have three credit cards and a car payment. My three credit cards, I think, add up to about twenty five thousand dollars, mostly from losing or being laid off from jobs and having to take low paying jobs. Previously, I was a stay-at-home mom for five years and I didn't have any retirement or anything. So I did leave that divorce with a bit of a settlement.

5:18But most of that money went to my living expenses and kind of acclimating myself back into not being in a marriage, not being supported. And then I will say like I did spend some frivolously and I'm not very proud of that. So most of it just kind of came from not preparing for, you know, for the future, like preparing for something bad to happen. I think that is why I got into the debt as well. I needed to get a new car after my divorce because the car I had gotten in the divorce wouldn't have lasted me too much longer because I'm a commuter. So I did get a car. I was able to put$12 ,000 down on that car,$6 ,000 from a trade-in, and then I put$6 ,000 of my own money.

6:07So I got a really good deal. At the time, the interest rates were not great, but I had really good credit at the time. So they gave me 6.0%. That's the best that they could do in 2024. Interest rates were just kind of wonky. But I did get a pretty good deal. I only paid$434 a month on my car note.

6:27Sean Pyles:For a current car payment, that's not horrible because cars are so expensive nowadays. I'm proud of that. Jessica, I'd like to hear when you began to realize that your debt was becoming a problem that was not as easy to get out of as you maybe thought it was going to be. I think when I started realizing I wasn't able to pay more than my minimum payment. Previously, when I had my credit cards, I would pay the balance off or I would pay way more than the minimum payment just to make sure my payments were going down. But because I had got laid off, the little bit of savings that I did have, I used that for my major expenses like rent, child care, daycare, and my car insurance.

7:17insurance I had about three three and a half months worth of savings for that and so the rest of my money that I was getting in unemployment I was using to pay down some of my credit card debt and but I used to also had to use my credit card to buy groceries and gas and such so and then I took a job that was paying me$25 an hour I went from$60 an hour to$40 an hour to$25 an hour It was really, really stressful. And so my savings went down because I used, you know, most of that to kind of help me pay for things for my rent and my bigger expenses, like I said, for my child care and such.

8:00Elizabeth Ayoola:And then Jessica, how long would you say in terms of the timeline did it take you to accumulate that debt or when did you notice it start snowballing? Because I know you said you lost your job. Was it three times that you lost your job? So how long did it take? I started accumulating the debt where I couldn't pay six months or so, six, seven months. Yeah. Because when I lost my job, I had pretty low credit card debt. So I was able to still pay it. But again, I was trying to save my savings for my big expenses. So at that point, I was just kind of paying the minimum payments because I was getting unemployment.

8:40Sean Pyles:It's a little scary how quickly credit card debt can rack up in part because the interest rates are so high. So we're going to talk through some ways we can get out of it. But I'd like to hear to start how you've been paying off your debt so far. Do you have a payoff strategy or what's been your tactics so far? My Chase card and my Citibank card, they offer like payment plans, but really it's just me paying the interest. I'm not making any kind of dent in the actual principle of the credit card debt. What are the interest rates on these debts, if you can recall? Chase is about 18%. I believe Citibank's the highest, 24%.

9:20And then my Capital One is 11%. And they're all maxed out.

9:25Elizabeth Ayoola:And with these credit card payment plans that you're doing as well, Jessica, have the lenders offered you, for example, lower interest rates or to waive any fees? No, they just offered for me to do the payment plan so that it doesn't put a dent in my credit. And then I'm not like it's not showing that I'm like making late payments.

9:50Sean Pyles:Do you know your credit score? The last time I checked, it was$630, but that's probably because I pay my credit. I mean, I pay my car note on time and I am making payments on my credit card. But, you know, it's just... Just your utilization is like almost 100%.

10:05Elizabeth Ayoola:Exactly. All right, Jessica, before we go into debt repayment options, let's look at your budget because that's going to determine what the best debt repayment option is for you. So thank you for sending in your numbers and being vulnerable and sharing your finances with us. correct me if I'm wrong but with you recently got a new job that's correct congratulations we love to hear that and after tax you're making around three thousand eight hundred dollars is that right yes yes okay so I noticed that you are paying uh almost two thousand dollars on rent does that feel comfortable for you right now no but unfortunately where we live at it's pretty expensive.

10:46When I moved in here, it was$18.50. And then after a year, they raised the rent$100. And so I live in a one-bedroom apartment. It's getting really, really crowded. We have two kids and two animals. So ideally, I would like to get a bigger place, but that's really all that I can find in a decent neighborhood for that price.

11:07Sean Pyles:Housing in the Bay Area is so challenging to find at all. And then if you do find something that If it's what your family needs, it's going to be expensive.

11:15Elizabeth Ayoola:Yes, yes. Unfortunately. Do you pay zero dollars for medical care? How does that work? Because I was going between jobs, I just didn't have any medical care. And so I wasn't paying on it. They're taking about$130 out of my paycheck for medical care. So I'm paying that. And then my ex-wife, she provides the medical care for our two daughters, which is helpful through her job. So yeah, I wasn't paying anything for a while and I probably won't be paying after I accept a different position that doesn't offer benefits, but offers more money. That gives you some financial relief. Something else that stood out to me is your transportation costs.

11:59Elizabeth Ayoola:It looks like you're paying almost$1 ,200 a month on total transportation costs, including your car note, gas, all things. Yeah, car notes and gas. gas is really really expensive right now you know um and insurance my insurance about 250 a month for full coverage my car notice 436 a month and then i also cross the bridge every day

12:23Sean Pyles:um i have the bridge tolls in the bay area are seriously expensive eight dollars a day wow yeah it's crazy yeah so it's pretty high um just to travel around every day okay i also Also noticed in your budget that you have about$1 ,000 a month in legal obligations. What is that? I just put that as for my kids' child care services. So my daughter's preschool will pay$725 a month. That's just my proportion. And then we also have a lovely woman that picks our daughters up and they stay with her for a couple hours while we're in between work. And that's about$400,$350 a month there. So that's what I meant by legal.

13:14I didn't know how to like put it in there.

13:16Sean Pyles:Yeah, I wasn't sure if you had like a judgment or any sort of alimony or anything. Okay. No. That's a relief. Yes. Be grateful to not have that. Yes. But there's still a sort of fundamental tension in your budget, which is that your base needs expenses are greater than your income. Yes. And so that's a really challenging place to be. And I assume this is in part because you're paying so much in your debts on an ongoing basis. Is that right? Yes. Yes. But one thing that I will say, I did accept a position that I'll be making more money. So that's a really helpful thing. I'll be making$37 an hour instead of$30 an hour.

14:00And then I also, my daughter, my youngest daughter will be leaving preschool next month. So that - Oh, congratulations. You get money back. That's a big deal. $750. I do have to pay during the summer for summer care. I think that will probably be around$500, so$200 less. And then after August, no more preschool. I'll just pay for their aftercare, which will probably be about$350 a month. So I'm going to get$400-something back, plus I'm getting more money and salary. So I think that might give me a little bit more cushion there.

14:38Sean Pyles:Yeah, that'll give you some breathing room. Because I imagine right now that you aren't really able to save anything, are you? No, not at all. And I mean, I barely can say$50 here and there if I can. And it's really stressful for me because I need to have some kind of cushion in in case I, you know, I just had to borrow money from my parents to get new tires for my car. So yeah, so that's, that's, it's been a really like stressful time for me. And yeah.

15:11Elizabeth Ayoola:Jessica, how much of your budget, if you could estimate right now, is going towards paying down your debt? Do you have like a dollar amount you can think of? About$5.50 a month. Across all three credit cards? Yeah. And the only one that really kind of knocks the principal down is my Capital One. That's more of like a starter credit card and they don't charge overdraft fees. They don't charge overcharging fees. I took that off because they kept letting charges go through, like reoccurring charges go through. So I took that off because it was like building. But that minimum payment has stayed the same.

15:47It hasn't gone any higher. So I've been able to make that payment. But the other two are kind of like closed at the moment until I make the actual minimum payment that I owe, which is like$500 for the city bank and I think like$385 for the chase. So I don't know if I should like do that consolidation program or I don't know.

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