Time to Reduce Debt Quickly Now

In my opinion, we are now at a period of potential asset deflation. The US housing market has been in a decline for the last 3 years. The decline started in 2005. The economy is going south and many smaller businesses are finding it harder to get financing because of unfavorable business conditions. Banks, who have taken huge earning hits in the sub prime mortgage and credit related losses and not aggressive in lending.

The general rule of thumb is that you only take on leverage on an appreciating asset. That is why when the housing market is on fire, or even in normal market conditions, taking on a mortgage makes sense because you are taking leverage on an appreciating asset. You also get deductions on your interest payments.

The same thing happened in the private equity world where huge leverage outs in an easy credit environment coupled with an OK stock market made a lot of sense.

But when you take on leverage on an asset which is declining in value, it becomes a double whammy. You end paying so much more for an asset which does not appreciate (that is why I never ever took out a car loan).

So what implications does this have for our most common debt – credit card debts and our mortgage?

Well, firstly, we should always try not to carry a balance and have credit card debt. That is because you are carry debt based on consumption that adds no value to you. You are not borrowing to finance an asset (though some people use their credit card lines for their business). As for your mortgage, I think now is the time where you should pay off as much and as quickly as possible. The housing bubble will take a while to reach equilibrium and experts estimate that prices need to fall another 15% to 20% to reach “fair values”.

So if you have good credit scores and you have credit card debt, I suggest you attempt to pay them off as soon as possible. Set up a plan and stick to it. You may want to consider getting a 0% APR balance transfer credit card to speed up your debt reduction plan.

If you are paying anywhere north of 6% on your fixed mortgage, now is the time to consider refinancing (you can check out sites like LMB Refinance Loan to get the best rates. Then consider using the extra cash you have to pay down your principal faster.

Now is certainly not the time to have lots of debt, especially when asset values (aka your home) is declining. If you have not given too much thought to this, I really think now is the time to really get your debt reduction plan on schedule.