Q. We have $12,000 in our “emergency fund” and about that much in high interest credit card debt. Should we pay off the credit cards gradually? Should we use the cash and pay the debt off? My spouse insists we should consider a home equity to pay off the card debt in one fell swoop and hold onto the $12,000.

A. You’re better off not using your “emergency fund” if you have one. I personally don’t believe you have an “emergency fund” of that size.

Ninety-nine times out of 100, a household that has sacrificed enough to have such a fund, will never let it grow to $12,000 before spending the money paying down the credit card debt, you claim to have. It’s not normal behavior.

Maybe you’re in the one percent.

Congratulations.

Also if your household is smart enough to save that amount, it wouldn’t have the credit card debt, you claim to have in the first place. Again, that’s not normal behavior.

Again, maybe you’re the one percent.

That being said, I’ll answer your question in this manner.

What’s the best way to tackle the debt?

Here are two schools of thought.

One: Many lenders and some financial gurus suggest using home equity to pay down credit card balances. After all, the cards usually have higher interest rates than a home equity loan. At the same time, mortgage interest is probably tax deductible. Right?

Two: The old-fashioned spend less and pay down the debt by adding much more to your minimum payments each month until the debt is retired.

I prefer number two. We humans are creatures of habit. Until you identify and change your spending habits, the home equity lines simply mask the issue.

If you pay everything in one fell swoop, you’ll miss out on the learning curve required to start living within your means.

By taking the time it takes to painfully pay down the debt you created, you’ll be learning new habits. You never overcome something until you are very familiar with it. You sound very familiar with debt. You’ve identified the issue.

I suggest you go through the debt repayment plans in Chapter 11 of No Balance Due.

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