1: Debt-Elimination Calendar: Most Expensive Debt First.. In his pamphlet and article “One for the Money” (in the Readings directory of this website), Elder Marvin J. Ashton discusses his debt-elimination strategy. His logic is that you should organize your debts and pay off your most expensive debts first.

He recommends that you set up a spreadsheet or ledger with a row for every month it will take you to pay off all of your debts and a column for each creditor (see Table 1). You start by paying off the debt with the highest interest rate; this way you are paying off your most expensive debt first. By doing this, you will be saving the most money. Once your most expensive debt is paid off, continue applying the same amount of money to other lines of credit until all of your debts are paid off. This is the critical point-- after you have completed paying off one debt, you must keep paying the same amount of money, but use that additional money to pay off the next most important debt. Then once you have paid off your debt, you continue paying yourself consistent with your personal and family goals.

Table 1: Debt Elimination Calendar

2. Debt-Elimination Calendar: Smallest Debt First. Others, such as Dave Ramsey, have recommended that those in debt pay off their smallest debt first. They use the same framework as above, but recommend borrowers attack their smallest debt first. In this manner, they see debts being eliminated, which shows success, which gives motivation for further debt repayment. While the "most expensive debt" first framework is better from a "total cost" point of view, both methods have the same objective and both can be helpful in eliminating debt.

3. Home Equity Loans. You have probably heard radio and TV advertisements for debt consolidation loans. Debt consolidation loans are home equity loans, or loans against the equity in your home. Home equity loans have some benefits: because they are secured loans (credit cards are unsecured loans), they have lower interest rates, which reduces the monthly payment on your debt. In addition, the interest on home equity loans may be tax deductible.

However, there are two drawbacks to this type of loan. First, by taking out a home equity loan, you may not be addressing your real problem: the bad habit of spending money you do not have and living beyond your means. If your spending habits have not changed, your spending will continue even after you take out the home equity loan.

Second, if you take out a home equity loan and you do not pay it off, you run the risk of losing not only your credit score but your home as well. Home equity loans put your home at risk because your home is used as collateral for the loan. Experience has shown that over 80 percent of those who take out a home equity loan to pay credit card debt have the same amount of debt they had at the time they took out the loan within three years. No spending changes have occurred, the bad spending habit continues, and the person is soon back in debt. And as the spending continues, the person may now suffer both a reduction in their credit rating and the loss of their home.

Should you take out a home equity loan to consolidate and pay off your debts? The answer is not easy. If you have already addressed the spending problem that got you into debt in the first place, it may be a useful alternative. If you haven't addressed your spending problem, it's likely that you will get into the same problem in the near future if no changes have been made.