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MONEY TALK

Borrowing More Money Just Digs the Hole Deeper

October 27, 2002|Liz Pulliam Weston | Special to The Times

Question: I was recently offered a seven-year, $15,000 personal loan at 9.9% interest from an out-of-state bank. Although the interest on most of my credit cards is 9.9%, the minimum payments on my $15,000 balances are so high that I have little left to live on until the next payday.

Unfortunately, I was turned down for the loan because I have too many credit cards with high balances. I believe I have good credit. How can I obtain one of these loans at a decent rate?

Answer: This may come as a terrible shock, but the way to get out of credit trouble is not to borrow more money.

And you, sir, are in credit trouble. Even paying the minimums on your credit cards is a strain, and you recently were turned down for a loan because you had too much debt.

Had you been approved for this loan, by the way, you probably wouldn't have received the touted 9.9% rate. If you read the fine print, you'll see that most of these "personal loan" offers have variable rates based on your credit. Yours apparently isn't as good as you thought because a lender looked at you and saw a considerable risk.

The answer to your problem is to stop looking for ways to make smaller payments on your debt. Instead, buckle down and make larger payments each month on your credit cards to get your debt paid off sooner. You may need to sell some assets, stop eating out or find a second job to speed things along.

Oh, yes, and by the way: Stop using credit cards to buy stuff. You should be on a cash-only basis until the last payment is made. That's essential to the whole "you can't get out of a hole while you're still digging" game plan.

Liability Insurance Is a Sensible Investment

Q: You've written about the importance of having adequate liability insurance. But if I have a net worth of $1 million and I get an umbrella liability policy that covers me for up to $1 million, what's to stop someone from suing me for both my net worth and my insurance policy?

A: Technically, nothing. Fortunately, in the real world -- and with real lawyers -- that's generally not how it works.

Given a choice between attaching your assets and settling for an attractive sum from your insurance company, most attorneys will settle for the insurance. If your liability coverage is grossly inadequate, however, and you've got anything worth going after, the opposition's lawyers will overcome their inertia and try to attach what they can.

Fortunately, liability insurance is relatively cheap. Boosting your liability coverage on your homeowners and auto policies to the maximum, then adding a $1-million umbrella policy, generally will cost you a few hundred dollars a year. For someone with a net worth of $500,000 or more, it's a sensible investment.

'Happily Ever After' Isn't Priceless

My column " 'Til Debt Do Us Part' Is Extravagant Couple's Vow' (Sept. 1) prompted comments from readers. One of the letters:

Thank you so much for setting straight the couple who said they could afford a $35,000 wedding but who in reality were maxing out their credit cards to pay for it. I'm a member of Debtors Anonymous, a 12-step group based on the principles of Alcoholics Anonymous. Spending and debting is such a disease in our country. We need more people like you willing to speak up and educate others.

We need, at the very least, a little common sense when it comes to using credit. Charging a wedding to a credit card makes no sense, even though this couple planned to pay off the debt with cash gifts from their guests.

Another reader's comments:

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Fifteen years ago, I was remiss in not convincing my fiancee that we couldn't afford anything more than a small wedding. At the time we had a combined income of less than $30,000, but opted for a wedding costing us close to $10,000. The logic was simple: We'll pay it off with all the wonderful cash gifts we'd receive. That, however, was an assumption, not a reality. We received $1,350 in cash gifts from about 15 of the 150 guests. The debt we incurred became one of the primary reasons our marriage lasted just barely longer than the open-bar reception.

As you learned, the stress of starting your married life in debt can be fatal to the union. Loving couples should consider giving themselves the gift of paid-off credit cards and an affordable event, rather than taking on bills they can't pay.

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Liz Pulliam Weston is a contributor to The Times and a graduate of the personal financial planning certificate program at UC Irvine. She is also a columnist for MSN.com. Questions can be sent to her at asklizweston@hotmail.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. For past Money Talk questions and answers, visit The Times' Web site at www.latimes.com/moneytalk.

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