Digging Out: Getting Out of Credit Card Debt by Angela DeBernardo

In the winter, when you hear the term “digging out” you think of large snowfalls and sore shoulders. Every January, a different kind of digging out begins in households across the nation – digging out of the hole you got into with Christmas spending. For medical residents, that hole can be enormous. With educational debt already high and your time and earning potential limited, consumer debt can seem insurmountable.

How’d We Get In This Mess In The First Place?
First of all, recognize that you aren’t alone. Many medical families find themselves burdened with high credit card debt. “We thought we were doing pretty well. “ says one medical spouse. “We had a budget for all our expenses that worked with my husband’s salary. I was home with the kids. We even had a little wiggle room for extras here and there. We didn’t plan on the car breaking down. Next thing we knew, we had 6 thousand dollars on a our credit cards and could barely make the minimum payments.”
Whether it’s a car breakdown or interview expenses, credit cards are often the fall back plan for a budget stretched to the limit. During training, there are expenses for board exams, travel to far-away family, interviewing trips and unexpected events like car trouble. Without significant savings to help, you will accumulate debt. So how can you go about paying down your debt when you can barely make minimum payments? Here’s the traditional advice – and some untraditional thoughts as well.


Using Home Equity Wisely
If you are lucky enough to own your home, you may be able to use the booming housing market to get relief. If you believe that your home has appreciated significantly since you purchased, you can use that profit now by obtaining a home equity loan or by refinancing you first mortgage and taking “cash out”. Home Price Check offers a free estimate of your current home value based on area sales to get you started; once you begin the loan process, a professional appraisal will be ordered. There are several good sites that allow you to shop for housing-based loans. Try The Lending Tree site to apply for multiple loans at once.


Replacing consumer debt with mortgage debt can bring tax advantages and lower interest rates but there are some significant pitfalls to this approach. First, when you trade credit card debt for a home equity loan, you are trading an unsecured loan for a secured one. This can be dangerous. If you can’t make credit card payments, you may ruin your credit score or get sued by the credit card company. Although this may seem terrible, it would be far worse to default on a home equity loan; the bank could take your house. Consider carefully whether you will be able to make the new payments. Secondly, many people are tempted to put more expenses on their credit cards once their consumer debt has been transferred. Make sure you don’t fall into that trap by closing any extra accounts and reserving your credit for emergency spending only.


Consider Retirement Benefits Carefully
Some programs offer a retirement program benefit. If yours does, you may be accumulating a small amount of cash in a retirement fund. It is possible to use this money towards your debt either by borrowing against the account or by taking the money out all together. Taking out the money will result in a 10% penalty – and the loss of the accrued interest until retirement. You may also pay additional penalties at tax time. Borrowing against the account is usually a better option. You can borrow up to 50% of the money in most situations and have 5 years to repay it.


In general, it is a bad idea to raid retirement funds because it destroys the long term investment interest you could earn. Repaying the principal plus that lost interest is usually impossible unless your financial situation changes dramatically. In medical families, salaries do typically increase dramatically – and retirement benefits can be negotiated in contracts. It might be possible to replace all the funds after training is complete. Consider using retirement funds only if the interest you are paying on the cards far exceeds the interest you are making on your investments. And if you do access your account, plan on repaying the money in your first year out of training to minimize the interest earnings lost.


Use Your Student or Doctor Status
You have one good thing going for you, no matter how deep your debt may be. Physicians are a good credit risk. If you are still in medical school, you may be eligible for many student loans. You can find information on many educational loan programs at www.ed.gov. Student loans are a better form of debt than credit card balances, if only because the interest rates are better. Student loan debt may also offer tax advantages – and most loans can be consolidated after training to reduce your monthly payment. If you are done with medical school, there are still specialized loan programs available to you. SunTrust offers unsecured physician loans to medical students, residents and physicians early in their career.


Ride It Out On Credit
If there is no escape from the credit card companies, you still have some options. If you can qualify for a lower interest rate card, apply for one and transfer your balances. If you are stuck with a high interest rate because your FICO score is low, figure out how much money you can pay towards each credit card. Pay as much as you can and apply any unexpected income to your balances. You can assure that your payments will always be on time by scheduling an automatic payment online. Over time, your FICO score will rise and you can apply for a better card with better interest rates. Then, you can transfer your balances and pay more each month. You can find a card comparison tool at Myvesta as well as resources for credit reports and FICO scores. If you can’t make the minimums, you need to talk to your credit card companies. There are some good non-profit consumer counseling services available that can help you. Financial experts often recommend the Consumer Credit Counseling Service.


Better Luck Next Time
Is it impossible to avoid credit card debt in training? Maybe – but it isn’t because medical residents and their families spend frivolously. Too few recognize the extra expenses involved in training ahead of time. Most often, a resident realizes that interviewing expenses will cost them thousands as they begin to consider fellowship programs. Board exam and licensing fees are exorbitant – and residents are not informed. It’s difficult to budget for expenses that you don’t even see coming. If you are at the start of training, plan ahead. Figure out what costs you will incur in the next few years. You can count on paying for board exams, licensing fees, moving expenses and interviewing costs. You can find the current fees online through your specialty’s board association. Licensing information can be found through your state medical board. Sometimes, you may be required to travel to meetings – at your expense. Like most families, you will also have holiday spending and vacation travel. No matter how small your plans, add up these values as well. For each spending event, divide the final sum by the number of months you have until it occurs. This is how much you should try to save each month. It may seem impossible, but saving the money before the expense will save you interest in the end – and untold stress. Of course, the car may still break down, but at least that will be the only surprise expense you have to accept.