CNNfn
February 6, 2004

Getting Out of Debt

MODERATOR: Consumer debt has more than doubled in the past 10 years to record levels and that leaves a lot of people struggling to make ends meet. For more from our CNN-fn's personal financial editor, here is Gerry Willis.

GERRY: Like most Americans, Dan and Ellen Schoemer have worked hard to build a life for their family. Dan thought his master's degree and job experience ensured him life-long employment in the lucrative field of computer programming. But things didn't work out as the Schoemers planned. Three years ago, his job was outsourced to India.

DAN: We were at a state of just about complete disaster. I mean, I was in danger of losing the house because of the real estate taxes.

GERRY: The Schoemers, like many Americans, find themselves with overwhelming debt. According to the Fed Reserve, consumer debt hit a record $1.9 trillion in October last year, excluding mortgages. That's $18,700 per household.

GERRY: The stress is evident in record high personal bankruptcy filings, record foreclosure rates, auto repossession rates are at record highs. Delinquency rates on manufactured housing loans, on credit cards are all at record highs.

GERRY: For the Schoemers, even routine costs like utilities and groceries spiraled. Eventually their debt minus their mortgage totaled $30,000.

DAN: It felt quite dreadful, actually. Of course, I had no money in the bank at all.

GERRY: Dan is currently a stock clerk at a home improvement retailer and has seen his income cut in half. A temporary solution? The Schoemers refinanced their mortgage for more than their previous loan, allowing them to pay off credit cards and cut their interest rate. Monthly savings: $800. But Michael Moskowitz, president of Equity Now, warns consumers.

MICHAEL MOSKOWITZ: Too many people are living off their equity. We try to caution them, but I think people look at their house as a wallet. It's a bank account.

GERRY: Although the Schoemers now have a workable budget, they are certainly not out of the woods.

DAN: Mentally, I'm still a middle-class person but financially, I'm not. Not any more.

GERRY: Well, here are today's top five tips. If you think your debt's out of control, start by asking yourself the hard questions. How much is too much. Are you relying on your credit cards to pay your monthly bills. Have you tapped retirement savings to pay normal and routine costs of day-to-day living and finally, do you not have any idea at all how much debt you have? Those are symbols, if you say yes to those questions, that your debt may be out of control. Another place to go, to the debt-0-meter, it's a calculator on bankrate.com to get a clear idea if your debt is too much.

MODERATOR: Is there such a thing as good debt, Gerry?

GERRY: Absolutely. You know, a lot of people owe a whole lot of money on their house. And a house is good debt because it's rising in value, you get a big fat tax break unlike credit card debt where the only thing you get from credit card debt is a headache.

MODERATOR: What about a plan? That's a good idea.

GERRY: Well, if you think you have a problem, you really need to sit down and think about how much money do I have coming in each month, how much is going out and what's the matchup between the two of those? If you've got a lot of credit cards, you're going to want to consolidate those to only two or three and if you're really having a problem meeting those dates, call up your creditors directly and arrange a payment plan. You know, they like to hear from you before the problem gets out of control.

MODERATOR: Part of the problem, or a big part of the problem, is too much spending.

GERRY: Well, exactly. You know, one of the big tips here, it's easy to save money if you just pay attention to the details. Start by thinking about small things like your telephone bill. It's easy to save money if you actually shop around and take advantage of some of the new technology, like voiceover IP. You can save as much as $30 to $50 a month. With your insurance, home and auto insurance, you can save as well if you, for example, take advantage of some of the discounts out there for good drivers or for people who put in security systems in their home. Go to billsaver.com for more ideas.

MODERATOR: We heard that couple in the piece that you did talk about well, some people look at their home as a bank account and that's a bad idea. But it is a source of value.

GERRY: It sure is. And it makes perfect sense to tap your equity, especially in the period of low rates like we've had over the last couple of years. If you're absolutely certain you can pay it off, there are a lot of products out there - home equity lines of credit, home loans, home equity loans and of course, cash-out refinances. But you're going to want to think hard about doing this because if you default on this debt, then you lose your home. Another thing to think about here - some of these products have variable rates of interest. That means as interest rates start to rise, and that's what the experts are forecasting right now, then you can find yourself owing more and more and more and possibly more than your home is worth. So Darin, it pays to really pay attention to the details if you're tapping your home equity.