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Financial Crisis Effects (continued): Debt solutions

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To continue our previous blog post “Financial Crisis effects on Borrowing Money Today” based on Bank of America’s guidebook Get Smart about Debt, here are two other financial rules outlined in the guide.

A – Tap home equity sparingly

Most Americans using a home-equity line of credit (HELOC) are doing it only for major items, such as education, home improvements or medical bills. Since the so-called subprime mortgage crisis, home equity is no longer easy money: lenders are cutting lines and real estate values are still falling. Indeed, major home equity lenders began to freeze, reduce or suspend borrowers’ home equity lines. If you are lucky enough to still have a HELOC, Bank of America is suggesting to only tap it if you’ll be left with more than 20% equity and if area home prices are levelling off.

B– Eliminate the right debts first

Money issues are known to be one of the most important factors responsible for Americans’ stress and anxiety. In order to eliminate your debts in the most effective way, you need a double strategy: Tighten your belt while accelerating payments on the debt that has the highest interest rate first (which typically are your credit cards). As you can see in the image below, small increases in payments can noticeably reduce the time and money required to zero out your debt!

repayment calculator

Once you are done with your highest-rate loan, do the exact same thing for the next highest-rate loan, and so on. However, there are some types of loan you may not want to speed up payments for, such as home or student loans, because of the tax deduction on interest.

Also, if you have little savings (less than six month’s worth of living expenses) Bank of America suggests you split the extra money between paying debt and building an emergency fund. This way, in the unhappy event of a job loss, you won’t have to return right back into debt!