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It's sink or swim for borrowers
Try not to get caught in a shark feeding frenzy as you look for an escape to safety.
Out of the red and into the black

Borrowing options that offer a lifeline

Balance transfer tips
If you go for a credit card offer that promises a low rate for balance transfers, don't use it for new purchases. Creditors will apply your payments to the amount with the lowest interest rate first; meanwhile interest for new purchases will accrue at the higher rate.

Michael McAuliffe, president of Family Credit Counseling Service, explains: "If I charged a $3,000 balance transfer, then went and charged another $500, I cannot pay the $500 off -- and that's going to be charged at the higher interest rate. So if I send them a $300 minimum payment, they're going to apply that payment toward lowest interest first. Then I've got $2,700 at the 1.9 percent, but now I've also got $500 at the 9.9 or 18.9 or 21.9 percent that I can't pay off until I pay off that teaser rate."

If you really want to use the transfer to full advantage, continue to play lower rate transfer offers against higher rate debt until you get all your debt at the right price, advises consumer credit expert Gerri Detweiler.  

"For example, you may be able to consolidate $2,000 of your high interest rate credit card debt. I can almost guarantee you as soon as you pay them off, they'll send you something in the mail saying 'come back -- here's a balance transfer offer for 6.99 percent,'" says Detweiler. "Then you take that and you play it against one of your other high interest rate credit cards and work on getting the interest down that way."

Home equity pitfalls
Too many people have borrowed against their homes only to find themselves in a dicey predicament because their home values have since dropped. They owe more than the property is worth. Banks are taking it on the chin because of increased defaults.

Assuming you have plenty of home equity to draw upon, you can still make money mistakes that will later haunt you. McAuliffe says the most common problem is that people who draw on their equity to pay off high-interest debt then begin running up credit card debt all over again.

"It's really about behavior modification, and the only way to pay down debt is with income and by cutting your spending," he says.

Keep it in the family
Your friend or family member is not likely to report late payments to the credit bureaus. They're also not going to like being taken advantage of. If you need money and can keep current on payments, this could be a good quid-pro-quo situation.

Scott Bilker, creator of debtsmart.com and author of "Talk Your Way Out of Debt," advises borrowers to value the relationship above financial gain.

-- Posted: March 17, 2008
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