Credit card debt relief was a big theme in this week’s money mailbag on ABC News Now.  Which debt relief agencies are trust-worthy? Which to address first – debt repayment or emergency savings? I’ve got the video from today’s segment, as well as my answers below.

Video link: www.abcnews.com

Shawn from Illinois:

“I have no credit card debt and a high credit score (800 last year).  I have several credits, but only use 2 of them regularly and pay the balance every month.  My question is, with some cards now charging inactivity fees, will it hurt my credit score if I cancel the cards I don’t use, or I should I hang on to them and try to remember to use them once and a while?  I’d love to simplify and cancel the cards, but I really like my nice, high score.  What’s the lesser of two evils?”

The lesser of two evils is to keep the cards you have open and active. Thirty percent of your credit score is based on your debt to credit ratio and another 35% is based on your credit history. If you close the accounts you’re wiping out that available credit in your name and the payment history of those cards, which will effectively hurt your credit score. My advice is keep the cards open, use them at least once a month to pay for affordable items so that they’re “active” and the card issuer won’t be led to close your accounts. To make things even easier, link those credit cards to a regular monthly bill, like your phone bill or your heating bill and then pay that off automatically using your checking account. 

Lida from Wisconsin:

 “We have credit card charges and we are wondering do these debt relief agency work? If so what ones do you recommend, we really need to get things together because we can never catch up.  We just want out.  Can you please help?”

I recommend the National Foundation for Credit Counseling. It’s a certified organization that’s been helping consumers deal with debt and bankruptcy issues for decades. They essentially act as advocates for you in trying to settle some of your debt. They’re not going to offer you loans to consolidate your debt – which is really a red flag I would say for some other debt relief agencies that are acting like they have your best interest, that maybe they’re non-profits…but be cautious of any of these agencies suggest loan consolidation because those can carry huge fees and late penalties. NFCC.org is a good place to start.

Lisa LeDuff from Georgia:

“I am 56 yrs old, and my husband and I are retired, although I work part-time as a medical assistant.  Going forward, what is the best investment strategy to maximize our 401Ks?  The majority of our portfolio is in stable value investment which feels safest.”

I think they’re doing the right thing. I also like the fact that Lisa is working part-time. Maybe it’s not her dream to work in retirement but that’s the reality that a lot of retires are facing. Bringing home additional income will be a nice supplement to their 401k withdrawals, which they can begin drawing on at age 59 ½. I don’t think you want more than 30% of your assets in stocks…and remember that it’s okay to be a little more aggressive if you haven’t been because you’re not going to presumably withdraw all of this 401k money at once. Much of it will continue to be invested for another decade or two during which time you can ride out bumps in the market place.

Adam from Michigan:

“I have over $20,000 in credit card debt.  All but one of my cards have low rates like 3.9% and lower, except one which is around 15%.  The one that is 15% has the most debt like $11,000.  Should I look into a debt settlement program and would it work with just the one card or would I have to submit all of them?”

I would start by calling up the credit card company where he has a 15% interest rate and seeing if they can offer him any type of settlement. Explain that you are in a financial bind. If you have had a loss in your income in the past year that may qualify you for a modification plan. I know some credit card issuers are doing that. You may get a lower interest rate which will bring down your monthly minimums or they may say give us 50 cents for every dollar of debt you have, pay it one lump sum and we’ll call it a day. The caveat is that settling will ding your credit report up to 7 years.  You can get someone to advocate for you through the National Foundation for credit Counseling. 

Aja from Maryland:

“If you have one major credit card that you are trying to pay down and you are trying to build your emergency fund and savings account, which is of greater importance? And how much should you contribute monthly?”

In this economy with unemployment a high risk I want say DO BOTH at the same time – much easier said than done. To be more specific, if you look at your income as a pie here’s how I would slice debt repayment and emergency savings. For someone who is thousands of dollars in credit card debt I would allocate 20% of take-home pay towards credit card debt. If 20% is too high then I would say stack your credit cards from highest to lowest interest rate, pay double the monthly minimum on that highest rate card and for all other cards – at least the minimum.

Then automatically I would take 10% of my salary and put it in a high-interest online checking account until I had at least a 6-month savings cushion.  That may take a while to reach, but it’s an important goal.