“I don’t feel like I’m struggling, but on paper it looks baaaaad”: Dealing with bad credit, high daycare costs, and credit card debt. How can I navigate this financial maze?

Hey Money Minder,

I’m in a bit of a pickle with my credit because of some high utilization and a pesky late payment. I’ve got around $8,000 spread across 5 credit cards and another $6,000 on a line of credit, all with high interest rates creeping up. COVID really did a number on my finances.

I’ve got $5,000 stashed away in savings with ally, but I’m hesitant to dip into that emergency fund for my kids. Daycare costs are sky-high at $1,800 a month, and my husband and I split the bill.

I know things will get easier in less than 2 years when my youngest is out of daycare, so I’m thinking of just paying the minimum on my debt for now. My credit score is in the dumps, but Credit Karma said getting a new credit card might help. Well, I did, and it’s got a crazy high interest rate.

I’m not too worried about retirement because I’ve been with my company for ages and the matching is solid. But I did reduce my contributions to 2% to focus on my debt for now.

I’m not exactly struggling, just in a sticky situation. I’ve got plans to tackle this debt once daycare costs ease up. Do you think I should dip into my savings to pay off the debt faster? Or am I better off waiting it out?

Thanks for your help!

Retired and Happy

Response from THE MONEY MINDER:

Hello There,

I understand that you are currently facing a challenging situation due to your bad credit and accumulated debt. It’s commendable that you are already taking steps to address this by decreasing your retirement contributions to manage your debt. However, I would suggest reevaluating your current financial situation and considering some practical steps to alleviate your debt burden.

First and foremost, it might be beneficial to create a detailed budget to track your income and expenses accurately. This will help you identify areas where you can cut back on spending and allocate more funds towards paying off your credit card debt.

Considering your high-interest credit card balances, it may be wise to prioritize paying off the cards with the highest interest rates first. This will help you save money in the long run by reducing the amount of interest you accrue.

While it’s understandable that you want to keep your emergency savings intact, you may want to consider using a portion of it to pay off a significant portion of your credit card debt. This can help you reduce your overall debt and save on interest payments.

Regarding the new credit card you obtained with a high-interest rate, try to use it sparingly and ensure that you pay off the balance in full each month to avoid accruing more debt.

Additionally, exploring ways to increase your income, such as renting out your third floor for a higher rate once circumstances allow, can provide you with extra funds to pay down your debt faster.

Ultimately, it’s essential to have a clear repayment plan in place and remain committed to reducing your debt gradually. It’s great to hear that you have a positive outlook on your future financial situation, and with careful planning and strategic decision-making, you can overcome your current challenges. If you need further guidance or assistance, don’t hesitate to reach out for help.

Best regards,
THE MONEY MINDER