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Catching up on bills

Dear Dr. Don,
How can I catch up on my bills? I have about $70,000 equity in my house, but my credit is real bad because I don't make enough money to pay my bills. I have tried consolidating my debts, but it brings my bills even higher, and they take so much out in fees that I've lost a lot of my equity to fees. I don't have a lot of credit card debt. Mine is mainly living expenses.

I just keep pushing off one payment to pay another. Right now I'm behind on my house payment, and my car lease ends in three months, and I don't know what to do. I am a single mom and can only stretch the money so far. I have too many miles on the vehicle to turn it back in on lease. My credit really stinks. I've been doing payday loans to catch up with my payments, but I'm sinking fast. Help.
Marooned Marie

Dear Marie:
Start out by putting together a household budget. Lay out your monthly income and expenses. Although there's a lot of good budgeting software available, you don't need a computer program to do this; a sheet of paper will do just fine. Don't forget to include the average monthly cost of annual and semiannual expenses like auto insurance and property taxes. This step will quantify the shortfall in annual income.

How did you get in this position? Are you trying to maintain an earlier lifestyle or struggling to meet your family's basic needs? Figure out if lifestyle changes would get you to a point where there isn't an income deficit.

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If you have to continually tap your home's equity to live then you're constantly trading in your investment in real estate for current income. Consider selling the home and either buy something more affordable or rent. The proceeds from the sale would pay off your mortgage debts, give you the cash to get current on your bills plus pay the end-of-lease costs on your car.

Alternately, you could buy the car out of the lease with the proceeds of a home equity loan or a cash-out refinancing. You would stop making monthly payments on your car and replace it with the monthly payments on the home equity loan. With the loan's longer term and potential tax-deductibility of interest expense, you could free up funds in your monthly budget.

Stop the payday loan habit. You can't dig yourself out of a hole with a shovel that effectively charges you 250 percent or more in interest. A subprime home equity line of credit, a HELOC, at 12.5 percent is a comparative bargain. The FTC pamphlet Payday Loans = Costly Cash can help you get religion about why you need to stop this practice.

Get a copy of your credit report and credit score. You can get a copy of your Equifax credit report and FICO credit score using Bankrate's Shop & Save channel. Subprime borrowers have access to credit; they just have to pay higher interest rates to cover the risk to the lender. This Bankrate feature explains how mortgage lenders grade borrowers.

-- Posted: Feb. 20, 2003
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See Also
Payday loans = costly cash
Bankrate's Shop & Save channel
Financial advice glossary
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