The Debt Adviser By Steve Bucci • Bankrate.com

Defeating debt requires personal change

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.
Eddy

Dear Eddy:
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 equity loans.

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 home
• 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 the Internet.

However you decide to pay off the debt, stop charging today!