Six Options for Managing Debt

By Karen Lawson
Mortgage Credit Problems Columnist

Carrying consumer debt can affect your credit, your buying power, and your morale. Paying off consumer debt including credit card debt, medical bills, car loans and payday loans can help you save money, simplify your finances, and improve your credit score. Although short term debt assist with managing your finances and maintaining cash flow, carrying endlessly revolving (and likely increasing) credit card debt is expensive and can negatively impact your credit scores. Here are some tools for managing and eliminating your debt.

• Debt Consolidation Using Refinancing: If you've owned your home long enough to have acquired sufficient equity, you may be able to refinance for enough extra cash to consolidate credit card debt, auto loans, and other bills. Lenders typically require that you owe no more than 80% of your home's current appraised value after cash-out refinancing is complete. Also consider how long it will take you to break even on closing costs after refinancing.
• Home Equity Loans: A home equity loan is a second mortgage on your home that allows you to convert home equity to cash that you can use for debt consolidation . As with your primary mortgage loan, a home equity loan provides a specific amount of money to be repaid over a specific amount of time with consistent payment amounts. Keep in mind that home equity loans are mortgage loans that can be foreclosed if payments are not made. In addition, a second mortgage lender has the right to advance payments to your first mortgage and foreclose if you miss payments on your first mortgage.
• Home equity line of credit (HELOC): A HELOC is a flexible type of home equity loan; it works more like a credit card than a mortgage loan. Your HELOC lender approves a "credit line" for you to use as needed. You may access funds up to your credit line as needed. This can help you save money as you're only charged for the amount used. HELOCs can provide funds for paying of credit card debt and other loans, but as with home equity loans, HELOCs are mortgage loans that reduce your home equity and can be foreclosed. They are typically offered with adjustable rates, so it can be difficult to measure potential savings if interest rates on your HELOC increase.
• Debt consolidation loan: This is an unsecured loan provided by a financial institution for the purpose of paying off debt. Some banks may provide personal loans that you can use for debt consolidation. Borrowers with good to excellent credit may be able to qualify for this type of loan. Try to get a debt consolidation loan through an institution where you have a checking or savings account or other relationship. Credit unions may offer consolidation loans to members.
• Your own debt management plan: If you don't own a home, or don't want to use debt consolidation loans, you can manage your own debt by paying off your balances with highest finance charges (APR's) first. Arrange your debts in order from highest APR to lowest. Pay minimum payments on all of your debts except the one with the highest APR. Pay the most you can afford on that debt until it's paid. Next, take the amount you were paying on the highest APR debt, and apply it to the next debt. Use any extra money such as bonuses, pay for second jobs, and tax refunds to liquidate debt faster. This works only if you understand how you got into debt, and can avoid using credit cards.
• Credit counseling and debt management programs: If you cannot make minimum payments on your debts, are facing foreclosure, or have missed several payments on your accounts, a professional credit counseling service may be able to help. These firms work with credit card companies to provide affordable repayment programs. There are plenty of "credit repair" scams out there, so make sure that you're dealing with a credit counseling agency approved by HUD or NFCC.

Select the options that work for you and start moving toward financial freedom.

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds an MA degree in English from the University of Nevada, Reno.

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