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Debt Management Guide 2008
Danger ahead
Debt problems don't just suddenly appear. If you're alert for signs of trouble, you can probably avoid them.
Danger ahead
The dangers of debt consolidation
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"For most people, when you look at the after-tax cost of home equity borrowing, the real interest rate is about 5 percent, " Walters points out. "That's terrific."

Compare that to an unsecured debt's typical 15 percent price tag and you're looking at $5,000 extra in payments on a $50,000 loan. That's a lot of money when your goal is to get out of debt.

Finally, combining debt through home equity loans can be your ticket to better FICO scores. That's because when the monthly payments drop, families begin to make headway on that debt total, and the Fair Isaac Corp. scores reflect that progress. Eventually, says Walters, they can rise to a level that commands still better interest rates and faster payoff should they again apply for a new mortgage.

The bad news: In these days of tight credit and declining real estate prices, home equity loans and lines of credit aren't the easy catch they used to be. Many lenders have either stopped giving out these loans or have tightened the requirements substantially.

Plus, undisciplined spenders who fall behind in paying off the home equity loans will lose their houses. You don't want to go to the well too often, treating this as an income stream.

Watkins compared home equity loans to "a financial crack house" because as home values went up, borrowers could keep borrowing more and more.

"You get addicted to borrowing, so you're not building a net worth," he says

And, of course, too many spenders learned that the real estate market can go south or their income could decline suddenly, leaving them with bills they couldn't pay.

"You have to control yourself while using this powerful tool," Watkins adds.

As we've seen before, if you select the flexible home equity line, interest rates can go up and put a squeeze on your monthly budget.

Zero-percent credit cards
The good news: Only a dim bulb would want to pay back more money than he owes. Zero percent is the ultimate in great deals. Enough said.

The bad news: Credit card companies grant their zero percent offers only to the golden few who already boast high credit scores, so if you are robbing Peter to pay Paul each month, Visa won't stick its neck out for nothing.

In fact, credit card companies have limited patience with even the chosen few and often extend the offer for just six months, anticipating a fine payback when the normal rate kicks in at the end of the introductory period. Borrowers using this route spend as much time looking for that next zero percent credit card application as they do paying down the balance, Latko notes.

-- Updated: June 16, 2008
 
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Compare Rates
NATIONAL OVERNIGHT AVERAGES
$30K HELOC 4.35%
Personal loan 13.39%
$30K Home equity loan 5.06%
Rates may include points
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