“We went haywire.” That’s how Henri Hammond describes a credit card spending binge. Six years ago, he and his wife, Felozia (pictured above), paid for their wedding with plastic and followed up with a similar spree to furnish their home. By the time the bills arrived, the couple had a whopping $53,000 in debt from credit cards and student loans.
The Hammonds, both 31, were paying thousands of dollars a year in interest alone, which is not tax deductible. “For the past few years,” says Henri, “we’ve been working on paying down our debt. Each month we make the minimum payments on each of our cards to avoid paying penalties. Then we use whatever money is left over to pay down the balance on the cards with the highest interest rates.”
Meanwhile, Henri has been putting in long hours to raise money for debt collectors. A tooling engineer with a major corporation in Arlington, Texas, he has logged enough overtime to boost a $72,000 base salary to $96,000, in addition to taking courses for his master’s degree in mechanical engineering. Felozia is a stay-at-home mom, looking after the couple’s two sons, ages 3 and 5.
The Hammonds’ hard work is starting to pay off. They’ve already reduced their outstanding debt to approximately $25,000, not including home mortgage and auto loan payments. And they’ve already paid off several credit card balances.
Their past extravagances, however, still haunt them. They have outstanding balances on 10 cards, totaling nearly $16,000. Because so much of their income goes to paying down their old credit card debt, the Hammonds have not been able to bank any money, aside from the little they put into Henri’s 401(k) account. (The couple also own undeveloped land they’re holding as an investment.) They’ve also been forced to get by with just one car. “It can be inconvenient sometimes,” says Henri, “depending on which shift I’m working, but that’s all we can afford.”
One approach to become debt free is to use a home equity loan to pay off some or all of those credit cards. Such a move would lower the couple’s interest payments. “We did that when we lived in Michigan,” says Henri, “and managed to pay off $11,000 worth of debt when we sold our house there a few years ago.”
In Texas, though, the situation is different. “Home equity debt is limited to 80% of home equity, so it doesn’t seem to be worthwhile,” Henri says. Their house is valued at $150,000, and the mortgage balance of $116,000 is 77% of that value, so there’s not much room for a home equity loan.
“While we pay off the debt,” says Henri, “we’d like to be able to afford a second vehicle and start to save some money.” In particular, the Hammonds would like to build a college fund for their sons. The boys now attend private school, costing a total of $2,500 per year, and school bills are likely to mount as they grow older.
Fortunately, Henri only has to pay $1,300 per