Defeating debt requires personal
Dear Debt Adviser:
My wife and I are up to our ears in debt. I'm considering a
home equity line of credit to pay off every thing we owe and change
the way we spend money and the way we live. What do you think of
the idea and if it is a good one, how do I stop us from the debt
trap again. Please help. We need some advice. Thank you.
Your question contains your answer: "Change the way we
spend money and the way we live."
A home equity loan can make a lot of sense for people
who can avoid falling back into the trap of using credit cards for
purchases. On the flip side, a home equity loan can be a disaster
for those who do not change their spending habits.
So, how will you go about changing your spending habits?
As in much of life, things begin with a goal, a plan
and a commitment. I suggest that you and your wife (and older kids
if you have any) sit down and discuss your short-term and long-term
goals. They may include vacations, college, retirement at a certain
age, etc. The key is to set goals so you are changing behaviors
for something positive. Avoiding or getting out of debt is not usually
a good enough motivator to keep the changes up. Once goals are set
and agreed to, you can work on a spending and savings plan that
will be your map to success.
1. For one month have everyone in the family write
down everything on which they spend money -- including the $0.50
packs of gum and $2 cups of coffee.
2. Get together and compare notes. You will find
out quickly where your money is going, and you can begin to redirect
it to the areas you choose, not just to products that TV commercials
tout. The key is you get to be in charge of spending decisions.
You get to say yes or no, using your goals as your guidelines.
3. Use the spending lists as a tool to create a
spending plan. Include all fixed costs such as rent or mortgage,
car payment, insurance and others. Then budget your remaining
income on the flexible items such as savings, food, entertainment,
gifts, clothing, etc.
4. Stay within your spending plan. If you have designated
$100 for the month in entertainment expenses and the money has
been spent, don't put dinner and a movie on your credit card.
5. If you do purchase something on credit, the money
to pay off the balance should be included in your monthly spending
plan. Plan to pay off balances in 90 days or fewer.
6. Don't forget to save. Most experts suggest that
you save a cushion of three to six months of expenses for unforeseen
events. This will help keep you off the credit cards to pay for
life's unexpected adventures. Also, and I have seen this many
times before, if you are really successful at saving, once you
have six to 12 months of expenses set aside, stop. Spend a little
more and live a little. You will have earned it!
Now that we discussed how to bring your spending into
line, let's take a look at the advantages and disadvantages of home
Advantages of home equity loans:
- Lower interest rates
- Lower monthly payments
- Tax-deductible interest
- Low or no closing costs
Disadvantages of home equity loans:
- Unsecured debt is now secured debt
- Default could result in the loss of your
- Used to eliminate unsecured debt only works if
you stop adding debt
- Additional time to pay off and additional
interest paid on your home
Assuming you and your wife are willing to make the
necessary changes in your spending habits, a home equity loan or
line of credit may be the best option to pay off your existing debt.
You will want to explore the differences between a
home equity loan and line of credit and decide which offers the
best terms for your particular situation.
If you find the planning difficult or confusing, you
can always get help at a Consumer Credit Counseling Service office.
These nonprofit agencies, associated with the National Foundation
for Credit Counseling, will help you regain control of your finances
through a spending plan. Tell them you are interested in just a
budgeting session. Most can help over the phone, in person or on
However you decide to pay off the debt, stop
The Debt Adviser, Steve Bucci,
is the president of Consumer Credit Counseling Service of Southern
New England. Visit CCCS
for additional debt
advice or click
here to ask a debt question.
-- Posted: Oct. 18, 2002