Ready to Tackle Your Debt? Two Alternatives to Home Equity Loans

Earlier today I wrote about using a home equity loan to pay off credit cards. I suggested that this may be a good option for somebody who has arrested her spending and is ready to focus on debt elimination. It's a move that carries a big downside, though, and is certainly not a good choice for everyone.

When I took out my home equity loan in 1998, I wasn't aware of any other options. I was swimming in debt and dying to get free. Somebody told me about using the value of our house to take out a loan, and it sounded liked a good idea. It never occurred to me to explore other possibilities. I wasn't financially savvy.

Now, however, I know better. If I were faced with the same situation today, I'd try two other approaches before using home equity to pay off debt.

Asking for a better deal
Many GRS readers have told stories describing how they've been able to get their credit card interest reduced simply by asking. In our discussion this morning, The Saving Freak even offered a template for doing this:

Most credit card companies will reduce the rate to something close to your home equity if you just ask politely. The line we coach people to use is, “I am trying to get out of debt and I need your help. Will you please reduce my interest to 0% for 12 months so I can get out of the hole I have dug for myself?” Usually they will come back with some offer at like 3, 6, or 8 percent. This is still a better option than home equity since they cannot come after your house if something happens and you cannot pay it.

A single phone call may get your credit card interest reduced to a rate similar to what you would pay on a home equity loan!

Implementing a debt snowball
A second strategy is to knock out some of your low-balance debt quickly. I'm a firm believer in the psychological benefits of the debt snowball as popularized by Dave Ramsey. I had never heard of this concept a decade ago, or I might have considered it. When I did learn about it in 2004, it became a key piece of my debt-elimination plan. Here's how this system works:

  1. Order your debts from lowest balance to highest balance.
  2. Designate a certain amount of money to pay toward debts each month.
  3. Pay the minimum payment on all debts except the one with the lowest balance.
  4. Throw every other penny at the debt with the lowest balance.
  5. When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.

Though this method is not mathematically optimal — in theory, you'll end up paying a little more in finance charges than if you attacked high-interest debt first — it has huge psychological benefits. It gives you quick victories, and helps you understand that you can take control of your finances and change the way you deal with money.

Addressing the real problem
Really, though, these methods all fail to address the real problem. Overcoming debt is not a matter of shuffling balances or finding the optimal payment schedule. Debt elimination starts with you. If you want to escape the burden of high credit card balances, you must make a conscious decision that you're ready to spend less than you earn. You must abandon the use of credit altogether, at least until your existing debt has been repaid.

More about...Debt

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Alya
Alya
12 years ago

We learn the hard way about everything in life. We fall then we find ways to rise. However how would be teach or instill good spending and saving habits in children? I look at mine and wonder where do I start? I want to better equip them before they get that first credit card and fall into the traps of consumer debts! Any ideas?

King of Debt
King of Debt
12 years ago

I would recommend to anyone that is considering paying down their debt with a home equity loan to consider alternative options.

The problem with paying off debt with debt, is that you can always add more credit card debt.

You have to solve the spending issues first, then your debt elimination can be successful.

Brian
Brian
8 years ago
Reply to  King of Debt

I agree. Without changing your habits, you can never get rid of your debt.

Unfortunately, it’s very difficult to change our habits 🙁

Lynn
Lynn
12 years ago

Even if you’re not up to your eyeballs in debt, it can be worth it to call you credit card company and ask for a better deal. When I graduated from college and my credit started to improve, the offers in the mail were improving too, so I called my current credit card company and asked them to offer me a better deal so I would stick with them. They reduced my rate by about 3% and added a rewards plan to my card. I have only paid interest on the card one or two times, but it’s nice to… Read more »

Mrs. Micah
Mrs. Micah
12 years ago

All very good ideas. HELs might work, but what matters most is that you learn and start paying off everything. 🙂

FinanceAndFat
FinanceAndFat
12 years ago

Well said. The true solution is really learning about frugality and breaking free from our consumerist culture. That’s the only reason I’m able to pay off my debt now- because I changed what I spent my money on, not because I found some magical debt payoff formula.

Stefan
Stefan
12 years ago

I would like to emphasize on the point J.D. and the King of Debt made earlier. Shifting your debt from high-interest credit cards to low-interest HEL is something that MIGHT help you to get out of dept (Congratulations J.D. You accomplished something really worth to be proud of 🙂 ). But it might also help you to get into even more dept. One of the largest full service banks in the world is very well known for it’s pratice to offer customers to shift several smaller loans (such as credit card dept) into a single one (for a better overview… Read more »

Ian
Ian
12 years ago

I don’t know why this isn’t discussed more, but I have been rolling my CC debt from 0% interest card to 0% interest card for about three years now. Obviously, this is nothing to brag about, but I haven’t paid any finance charges on this debt. Simply google for “zero percent interest credit cards”. There is one website that ranks the best ones and tell you all the variables in an easy to compare chart. Just make sure you pick one with no TRANSACTION FEE. I’m currently on a Discover Miles 0% for 12 mos. card and the miles paid… Read more »

Heather
Heather
12 years ago

Wow, I would love to know how often people are successfully able to get their APR lowered. I used to have three loaded cards but was recently able to pay one of them off completely. So I called the card I paid off and politely asked for a reduced APR. They told me I “didn’t currently have an offer for a lower APR.” She wouldn’t even pretend to negotiate with me. I continued to politely explain that the card was paid off, so if I couldn’t get it lowered, I’d simply cancel the card. She didn’t care. So I called… Read more »

Jason
Jason
12 years ago

Just minutes ago, I called Citi and got them to match the 0% balance transfer rate of an offer I got in the mail. It’ll go up after a year, but to a much lower rate than my original. I don’t know how much it helped, but I was sweet as peaches to everyone I talked to. Quite apart from the strategic value of niceness, I figured that while they may represent an Evil Empire, they’re actually just people with families putting in thankless call center hours coming up on the holidays. Anyway, I think it also helped that I… Read more »

Jason
Jason
12 years ago

We decided against the HELOC and decided to just plow through our debts one at a time, in Dave Ramsey snowballing fashion. We are only about 30% of the way through our debts, but we have already eliminated 4 monthly payments 3 credit cards and 1 revolving loan.

Troy Robertson
Troy Robertson
12 years ago

Keep it at Jason!

Ricardo Bueno
Ricardo Bueno
12 years ago

In ending your post you made a point that I wanted to lend emphasis to…

If you want to tackle your debt effectively, it starts with a conscious decision to exercise frugal spending habits in your day-to-day! Otherwise the cycle repeats itself…you use one credit line to pay off the other, only to max out the original credit card again.

Richard
Richard
12 years ago

Unfortunately, most credit card companies will refuse to reduce APR’s when you have substantial debt on their cards.I have 4 BOA accounts, two of which are business related. One account had no balance, but a 18.9% rate. I called BOA & they refused to lower any of the APR’s including the line with no balance. Their response: Too much Debt!

Glen Power
Glen Power
6 years ago

Awesome weblog. I just love your blog!!

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