Ways to Pay Off High-Interest Debt

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Dear To Her Credit,

I have two high-interest cards with large amounts on them. Should I shop for two 0%, 18-month credit cards and transfer my balances to them? Or should I open a home equity line of credit at my bank, pay the one card off, pay down over the course of a year the line of credit, then use the line of credit to pay the other card off and, again, then paying down the line of credit? Help!

- Debbie

Dear Debbie,

I'm not as concerned about how you pay the debts, either by taking out 0% balance transfer cards or via a home equity loan as long as you pay off your cards as rapidly as possible. It's hard to overstate how destructive carrying a large credit card balance is to your financial health. High-interest drags you down in the best of times. When times get tough, for example, if you get sick or lose your job, a heavy debt burden can be the difference between financial survival and catastrophe.

There are two schools of thought on how to best pay off high-interest debt. Some experts are adamant that you should just pay the debt off as quickly as possible without taking on more debt. They point out that shifting debt around or taking on new debt to pay off old debt doesn't solve anything.

The second school of thought says you should do whatever it takes, even if that means taking on new debt, to lower the amount you're paying in interest expenses and fees. That way, you devote as much as possible of your financial resources to paying off your debt balances.

Both arguments have merit. The first group of experts has a point: Taking out new debt to replace old debt doesn't improve your financial position in the short term. It may put you further behind for the moment if you pay balance transfer fees or fees for opening a line of credit at the bank. People may think they will be motivated to pay down the debt after the transfer. However, if the high interest rates they'vebeen paying weren't motivating enough, I'm not sure anything will be. Chances are that you may find yourself unable to pay to off your balance transfer card(s) within the introductory period, which would put you right back where you are now. The no-new-debt argument  also puts you in another dangerous position. If you take out a line of credit or open more credit cards, you have a larger capacity to spend money right away. If you're not careful, you could use your new credit to pay off your cards, only to see the old cards fill back up again. You wouldn't be the first to have their debt payoff plans backfire this way.

On the other hand, the second group of experts is right about one thing: If you're paying high-interest rates on a substantial amount of debt, you may be spending so much on interest expenses every month that you can't make progress on the balance.

My advice is to consider both schools of thought and decide which plan works best for your situation. Pay the debts off on your current cards if you can do so in a short period of time. Playing "hot potato" with a credit card balance is not a permanent solution. Instead of spending time looking for new creditors, use that time to make a strenuous effort to pay off your debt. Perhaps you can sell something -- a car, investment, household items or sporting goods -- to get a fast start paying down your debt balance. You may be able to work extra hours or find temporary evening or weekend work. While you're working hard to pay off this debt, consider cutting way back on discretionary expenses, such as fast food, vacations and entertainment. It's only temporary. For most of us, it's surprising how much we can cut back for a limited period of time.

However, if you're paying so much interest that you're barely making a dent in your principal, or if you have so much debt that you could spend years paying it off, you may need to follow the second school of thought and find a lower interest loan.

If you have a good credit history and score, you may be able to get a 0% card and transfer your two credit cards balances to it. I'm not sure why you would want to get two new cards, unless the balances are so big you can't qualify for that kind of credit limit on one card. Watch out for balance transfer fees. A balance transfer calculator can help you crunch the numbers.

Be careful to read the fine print if you take out a 0% card. The bank may start charging you interest sooner than you think if you are late on a payment or make any other seemingly minor mistake. It's a good idea to set up automatic minimum payments if feasible, to avoid triggering an unexpected end to your 0% introductory period. And the last thing you ever want to do is to make new charges and add to your already inflated balance.

You might be more comfortable with a home equity loan. If you choose a fixed-rate loan, you won't have to worry about the rate going up before you pay it off. You may even feel safer making larger payments on a home equity line of credit, knowing that you can borrow the money back if you need to.

Once you pay off your high-interest cards with a 0% balance transfer deal or a home equity loan or line of credit, make sure you immediately close those cards. It's not enough to cut up the card or hide it someplace. Call the bank and close the account.

It's encouraging that you are making plans to get out of debt. Focus all your efforts on making a budget and finding money to pay your balances off. When you no longer carry a balance, it won't matter what your interest rates are. The best 0% interest rate is the one you give yourself by never carrying a balance on your credit card again.

See related: 2014 balance transfer survey: Beware combo deals, two-tier fees, Over your head in debt? 5 extreme budgeting ideas