Dear Mary: You recently said using home equity to consolidate credit card debt is a bad idea. What’s wrong with getting a lower interest rate and combining balances? — Jenna
Dear Jenna: When dealing with risk, it’s always a good idea to ask yourself what is the worst that could happen? What is the risk?
If you stay with your current situation, and for some reason, you default on a credit card balance, here’s what will happen: The creditor will trash your score and possibly sue you for what you owe. But the lender cannot take your house.
If you default on the home equity loan, the lender will take your home through foreclosure, no questions asked. Sure, the interest rate will be less than on a credit card account, but the risk is so much greater.
Another problem is human nature. Most people who do as you suggest — using their home’s equity to pay off credit card debt — don’t change their spending habits. They don’t consider why they got in over their heads with high-interest debt in the first place. They transfer the debt to their homes through an equity loan and believe they’ve paid off those credit cards. Then, in about two years, they find themselves with all the accounts maxed out again. Now they have the home equity loan payments and maxed out credit card accounts, too. Double the trouble!
My best advice is to buckle down, stop using that credit card and get it paid off by whatever means possible.
Dear Mary: I have $10,000 in credit card debt. I have been making payments on time, but the balances never seem to go down. I can’t see a way out. Every time I feel like I can see a little light at the end of the tunnel, something goes wrong with my 15-year-old car. I would love an easy answer, and I’m hoping you can give me some new insight, because I’m really frustrated. I need a fresh start. — April
Dear April: Getting out of debt is hard. If it were easy, no one would be in debt. If you are truly committed to getting out of debt, I can teach you how to do it once and for all. There are two reasons you have not been successful: You don’t have money in the bank in an emergency fund, and you don’t have a written plan. You need both.
Without a cushion of money in the bank to cover unexpected expenses while you are getting out of debt, you will forever be in this loop of paying down debt and then running it back up when you have an unexpected expense.
You must see saving an emergency fund as more important than getting out of debt. I’m serious. That means you have to do two things at the same time: crash-save and stay current with your debt payments. It’s like juggling two balls in the air. You can do it. You just need someone to show you how:
Stop using the credit cards, cold turkey. Don’t close the accounts; just cut up the cards, or hand them off to a trusted friend — whatever it takes so you cannot use them.
Crash-save, starting today. No amount is too small to save. Liquidate stuff you don’t need to grow your savings faster. Work extra if you can. Become obsessed with saving money. Do not feel guilty that you are saving when you have so much debt. This is the only way you will ever get out for good.
Pay only the minimum monthly payment required on each of these accounts.
Line up your debts from small to large. When that smallest debt reaches $0, take its payment and add it to the next debt in line while continuing to pay the minimum payments on the others.
This is a condensed version of my Rapid Debt-Repayment Plan, the subject of chapter seven in my book, “Debt-Proof Living.” It is exactly the way that I repaid more than $100,000 in credit card debt some years ago! Watch your mailbox. I am sending you a copy with my compliments.
Mary invites you to visit her at EverydayCheapskate.com, where this column is archived complete with links and resources for all recommended products and services. Mary invites questions and comments at https://www.everydaycheapskate.com/contact/, “Ask Mary.” Tips can be submitted at tips.everydaycheapskate.com/. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog and the author of the book Debt-Proof Living.