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Dr. Don Taylor, CFA, Bankrate.com advice columnistDebt consolidation

Dear Dr. Don,
Given the current interest rates, what vehicle would be the best to reduce credit card debt? I owe between $8,500 and $10,000 on two cards. I do not use them any more, so only finance and late charges are added. These, though, are almost insurmountable. I have $20,000 to $25,000 equity in my co-op apartment that I'd be willing to tap into for the deductibility, but am having a hard time coming up with a plan. I have other debt, but it is manageable (mortgage and car payment). It's the consumer stuff I need to get a handle on, so I can start to pay some student loans instead of deferring yet again.
--Alicia

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Dear Alicia I can understand finance charges accruing on your credit card debt, but you've got to put a stop to paying late charges on these cards. Get at least the minimum required payment in on time. Late payments can show up on your credit report and hurt your ability to get credit, or they could increase the interest rate on that credit.

Using a home equity loan or a home equity line of credit (HELOC) to pay off your credit cards holds three potential advantages to you: it extends the debt over a 10-year period, it reduces the interest rate on the outstanding debt, and may allow the interest expense to generate a tax deduction.

The downside to this is that you are risking your investment in your home when you borrow against the equity to pay off your credit card debt. If you go this route, make sure that you are committed to living within your means so you won't get into this situation again. To learn more about home equity loans and lines of credit, and to search for the best rates, start at Bankrate's home equity channel.

You need to put together a monthly budget to track where your money is going. The student loan deferment or forbearance may have been necessary, but unless they were subsidized loans, the interest builds up and is added to the outstanding loan balance putting you deeper in debt.

If your home computer doesn't already have personal financial planning software available to you, try the free budget worksheet at The Commonsense Consumer to help you develop a budget. Then use Bankrate's budget calculator to see how your monthly expenses stack up against national averages.

Bankrate.com's corrections policy -- Posted: Sept. 25, 2001

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