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Dear Erica,
I am only a couple of months away from finishing my debt plan with Consumer Credit Counseling. I have been paying $886 every month and never missed one payment for the past 4-and-a-half years. During that time, I even paid off my car note. So, except for my mortgage, I will be free of any debt. It’s a miracle. Should I get another credit card now? And what should I do with the $866 that will now be back in my bank? I have two girls, one 8 and the other 12, and I’m thinking of saving for their college educations. — Jeanie
Hi Jeanie,
Your excitement is palpable and well deserved! Soon you will have completed something remarkable, and that’s paying down what clearly must have been a large amount of credit card debt. You’ve stuck to a plan, which shows an impressive level of commitment. Sending nearly $1,000 every month without fail is a major achievement.
As a reward, in a few short months you’ll have quite a bit of expendable cash left over. It’s a good idea to use some of the money for your daughters’ future higher education costs. Before you do that, however, I would like to be sure that you’re covered in a few other areas first. They are:
- Your retirement. It is very important to secure your non-earning years with enough cash to live on. Therefore, if you haven’t been contributing the maximum to either your employer’s tax-deferred retirement plan or an IRA, make those changes right away.
- Emergencies. Most credit counseling agencies expect their clients to save at least a little each month for unplanned expenses, but if you haven’t been, or the amount you’ve set aside is inadequate or depleted, put some toward your rainy day fund. Prepare now, so you’re not tempted to borrow for things like new tires or higher-than-expected medical costs.
- Fun. Perhaps it’s the hedonist in me, but if you’ve been scrimping and denying yourself pleasure all these years, why not use a little of the money for a good time? Think about what you’ve really been craving — an exotic vacation, hours at a day spa, an updated wardrobe — and go for it.
Then comes your kids’ college education. A common way to save for those very expensive years is with a 529 plan, since it offers strong tax benefits. For example, while you can’t deduct contributions on your federal tax return, the money you invest in the plan will grow tax-deferred. Your own state may offer additional tax breaks. Find out more about college planning at Savingforcollege.com. When you’re ready to save, I think a financial planner is a good investment.
Now for a fresh, clean credit card! By deleting your balances and establishing a long-term, perfect payment pattern, I bet you’ve built quite the impressive credit history. It’s a myth that debt repayment plans hurt your FICO scores — they are not factored in at all. Get ahold of your scores to see where you stand. With those numbers, you will be able to pursue the right card for you and your level of credit risk. If your scores are high — in the mid-700s and above — you could be eligible for a rewards card that allows you to build up points redeemable for that lovely trip or some fashionable new clothes.
But whatever card you get, I think you now know what to do with it: charge prudently. As you’ve experienced, debt is a heavy, dreary weight that’s a pain in the neck to repay.
