EDITOR'S NOTE: This article is from Kiplinger's Success With Your Money special issue. Order your copy today.
Credit-card debt isn't all bad. A little can get you out of a tight financial jam -- but a lot can lead to its own money emergency.
How can you tell if your debt load is nearing a critical level? Look for these symptoms:
You're unable to make the minimum payments on your credit cards
You borrow from one card to pay another
You're frequently charged fees for late payments or going over your credit limit
You use plastic out of necessity rather than convenience
You forgo contributions to savings and retirement plans because of your debt
You devote more than 20% of your take-home pay to making payments on credit cards and loans other than your mortgage.
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If you find yourself in any of those situations, don't panic. Finding a cure may be as simple as working out better terms with your creditors, consolidating your debt on a credit card that carries a low interest rate or, if necessary, taking out a home-equity loan.
Need outside guidance? A reputable credit counselor can help you craft a debt-management plan that works for you. And if all else fails, you can declare bankruptcy.
For Juan Salazar, the remedy was credit counseling. Salazar, 33, owns First Choice Paint & Body Shop, in Terrell, Tex. When he and his wife, Elizabeth, had their second child in 2004, they had no health insurance and paid most of their medical bills with credit cards. Once their debt totaled $25,000, it became too much for them to handle alone.
In 2005 the Salazars enlisted the help of the Consumer Credit Counseling Service of Greater Dallas, which consolidated their debt and lowered their interest rate. The agency also helped the Salazars cut back on their expenses and stick to a budget. "We wanted to try credit counseling before taking an extreme measure like filing for bankruptcy," says Juan. Now he and Elizabeth plan to be debt-free by 2009.
Grab a 0% offer
You can give yourself a respite by moving your balances to a card that charges 0% or another low introductory rate on balance transfers. To play this game, however, you have to keep tabs on the interest rate, your balance and the calendar. If the account isn't paid in full by the end of the introductory period, you may have to transfer your balance again to dodge an interest-rate spike.
You may also be able to take advantage of an offer that gives you a low fixed rate for the life of the debt. You'll have to compare that choice with the possibility that you might receive a better deal in the future. But it's often best to go with the certainty of a fixed rate rather than waiting for an offer that may never come.
One caveat to switching your balance: Juggling various credit offers can cause your credit score to drop because lenders take note when you apply for or open a number of accounts within a short period of time. To limit the damage to your credit score, keep existing accounts open when you move a balance to a card that offers a better deal. Closing an account reduces the average age of your accounts and increases the ratio of your outstanding debt to your available credit. Both of those factors will have a negative impact on your score. (Learn more about building a good credit score.)
Even as the air wheezes out of the housing bubble, consolidating your debts with a home-equity loan will get you an attractive fixed rate. Recently, rates have averaged about 8% for a home-equity loan and 9% for a variable-rate home-equity line of credit. And borrowing against your house comes with a bonus: Interest on up to $100,000 in home-equity debt is tax-deductible. (Shop for the best home-equity loan rates.)
The downside, of course, is that your house is on the line. To keep your roof over your head, it behooves you to pay off your outstanding debt and stop the flow of red ink.