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Learn Ways to Reduce Credit Card Debt Without Home Equity

written by: •edited by: Jason C. Chavis•updated: 4/14/2012

If you have credit card debt and a home, you don't have to use the valuable equity in your home to pay off credit cards. This article will show you how to reduce credit card debt without home equity by developing a plan to reduce the debt and pay it off.

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    Types of Debt

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    Debt refers to the amount of funds borrowed from a financial institution. “Good” debt typically refers to debt taken for things that you need to have but can’t afford to pay for in its entirety. Debt taken for necessities such as homes, education and cars is considered good. Although this debt is considered “good”, it is recommended that this kind of debt be taken out wisely and that payments of this debt be manageable. On the other hand, “bad” debt is considered to be any debt taken for items that are not needed and cannot be afforded in its entirety. Revolving credit card accounts usually fall under this category.

    Another category of debt is the home equity line of credit or HELOCs. Home equity refers to the amount of money paid towards the price of the home. Home equity loans can be taken against the amount of equity built up in the home. This type of debt can be used for something that is needed such as home improvements to the home or can be used to pay off credit cards. Using a home equity line of credit is not recommended for debt payoffs primarily because this activity can unnecessarily deplete the amount of much needed equity in the house. Learning how to reduce credit card debt without home equity is useful to save valuable assets.

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    Budgeting For Paying Off Debt

    Instead of taking money out of the house to pay debt, it is important to create a plan and budget to first reduce the debt and eventually pay it off the debt over time. Financial professionals recommend that the amount of debt not exceed more than 30-40% of a person’s total income. When paying off debt from credit cards, follow these steps to creating a budget for payoff.

    Step 1: Set a timeframe for paying off the credit card(s)

    Depending on the amount of debt and the income, determine how much time is needed to pay off the credit card debt. Payoff may require working additional jobs to increase income.

    Step 2: Pay off the highest interest credit card first. Pay more than the minimum on this card while paying minimum on all others.

    Consider the finance charge plus an additional amount to ensure paying more than the minimum. For example, if you have debt on two credit cards with interest rates of 20% and 15%, respectively. Use the finance charge on the card with 20% interest rate to calculate doable payments for the month.

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    Tips For Reducing Credit Card Debt

    While many people pay off credit cards by using home equity lines of credit. When looking at how to reduce credit card debt without home equity loans, keep in mind that there are several ways to do this without using the equity in a home. You can decrease credit card debt by –

    Consolidating debt from multiple cards

    Consolidating debt involves combining debt from multiple cards onto one card. If the credit history and score is acceptable, apply for a personal loan with a lower interest rate from a credit union or bank. Use it to pay off the debt from the cards owed. Consider using a co-signer for the loan if the credit history is not acceptable.

    Transfer balances to another card

    Apply for a credit card with a lower interest rate and transfer the balances from the debt owed to the new card. Search online and ask your local bank for “balance transfer” card offers. Be aware that most balance transfers offers include a lower interest rate for a limited amount of time and a limited amount of debt that can be transferred.

    Pay extra payments towards the balance

    Monthly payments for credit cards include the finance charge (interest rate) plus an amount that goes towards the balance owed on the credit card. By making extra payments in addition to the regular monthly payments, these payments can be designated towards the balance. When sending an extra payment, include a letter requesting that the payment be applied towards the balance of the credit card. Over time, the finance charge will decrease because it will be applied to a lower balance amount.

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    References

    Think Credit Cards – How to reduce credit card debt without home equity loans

    http://www.think-creditcards.com/how-to-reduce-credit-card-debt-without-home-equity.html

    Motley’s Fool.com: Reducing Debt - http://www.fool.com/personal-finance/credit/how-to-guide-reduce-your-debt.aspx

    (Photo courtesy of WikiMedia Commons – http://commons.wikimedia.org)