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Terminate the debt monster
Attack credit card debt with a 30-month debt-management plan, advises radio personality Clark Howard.
Out of the red and into the black

Spotlight: Clark Howard

Can't some debt-consolidation loans also be a risky proposition for consumers if they tie it to an asset such as their homes? For instance, they might use a home equity loan or a home equity line of credit to pay off credit card debt.

Yes, when people do debt consolidation using a home equity line of credit, that can be extremely dangerous. In some cases when you do a home equity line, all you are really doing is putting your name at risk; but in other situations, you could literally end up homeless. And you see that playing out now because nobody really thought that home equity lines could end up being as dangerous as they are.

What's happening in many places across the country is people are finding that home values are shrinking. And when they want to sell and get out, they're finding they can't do that because of what they owe on the home equity line. In fact, I know somebody who is winding up bankrupt because of this exact scenario.

So, if you are serious and want to tackle the "debt monster" in the right way, how should you go about it? Which debts should you tackle first and which debts can be left for a later, long-term campaign?

With credit cards, that's the 'hidden illness' that's just eating away at you, because there's no requirement that you pay your balance off ever.”

It all really depends on who you're in trouble with. If your situation resembles that of the typical caller that I get, well, there's a car loan or two, a mortgage on a house, maybe a second, and then there are credit card debts.

With car loans, people should pay those out as agreed. That debt is for a finite period of time and it gets paid off no matter what. So that's something for down the road and you just let time heal that. With the home, too, if you're still paying and making all of your payments, you're also paying that off long-term, as agreed. But with credit cards, that's the "hidden illness" that's just eating away at you because there's no requirement that you pay your balance off ever.

That's the one debt I want people to tackle first. If it all possible, depending on how much debt they have, I'd like for people to look at a 30-month plan for becoming completely credit card debt-free.

Would you start by tackling your largest credit card debts first, or would you begin by tackling the smallest ones?

There are two philosophies on that. One is Dave Ramsey's. He sees people being overwhelmed by the sheer number of debts they have, so he recommends going after them from the smallest to largest. So, for instance, if you have 12 to contend with, you go after the smallest one first, you knock it out, and then you have eleven -- and then you go through that process until you eventually have none.

I, on the other hand, would prefer that people attack their highest-interest rate debt first, paying minimums on all of their other cards while throwing the most money possible at the highest-interest rate card. And once you wipe one out, then you move on to the next highest, and the next highest, and so on.

-- Posted: March 17, 2008
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