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Everyday Cheapskate: Credit Card Debt and How to Get Rid of It Forever

Mary Hunt on

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:

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