Debt Management Basics
debt
Lower payments and a tax break

Most of us can run up credit card debt without even knowing exactly how we did it.

We look at that statement with the big numbers and try to remember where the money went. A few dinners here, some clothes there, a short weekend getaway, late charges and, finally, over-the-limit fees. Then add lots of interest that your parents used to be able to deduct from their taxes but you can't.

What makes it worse is that when you're on a fixed paycheck, it's difficult to pay off that debt incurred in good times past. The best solution is to get a clean break by rolling that debt into a home equity loan.

If you are borrowing to build a new kitchen, you feel OK about the borrowing, since you know you're adding value to your home. And if you end up with a new kitchen, perhaps you'll spend less money in the long run on eating out.

Why tap home equity?
Most home equity loans are taken either to:
  • Make improvements that add to the value and enjoyment of the home, or
  • Refinance the good life that you incurred on the plastic you carry in your wallet.

However, when you're borrowing to refinance credit cards and consolidate your other loans, the decision gets more difficult.

A lot of people find themselves with far more credit card debt than they can handle. If you're in this situation, start arranging to refinance the debt into a home equity loan.

In fact, if you're really feeling financially daring, add enough money to get that boat that you couldn't get when you were maxed out on the credit cards.

That's a joke, but this isn't: Remember that you're already in debt with the credit card companies.

Refinancing's many benefits

Refinancing your debt into a home equity loan doesn't increase your debt. It doesn't add a dime to what you already owe. It just moves the debt.

By refinancing, you're shifting the debt from various credit cards with differing due dates to one lender at a lower interest rate with a fixed repayment plan. In addition to the convenience of consolidating payments and payment dates, you create a tax benefit like your parents had before 1987, when they could write off credit card interest on their taxes.

The major downsides to this strategy are that it leaves you with refreshed credit limits on the plastic that you carry in your wallet and puts your home at risk if you don't pay. If you're not careful, you will wind up facing the same problem down the road.

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