MANAGE YOUR CREDIT SOURCES LIKE AN "OUTVESTMENT" PORTFOLIO

Reading the press coverage about families' problems with mortgage debt, credit card delinquincy, and short-sales of homes gave me a thought. Why not manage our "portfolio" of debts-owed the way we manage a coordinated portfolio of assets-invested?

I encounter so many (especially younger) homeowners and home buyers who have difficulties with the mortgage aspects of selling or buying or their home. The sellers have to sell for less than enough to pay off their current loan and walk away free and clear. The buyers have difficulty getting approval for loan origination. Often, they got in to that squeeze because their handling of other credit commitments spilled over in to their mortgage credit realm.

For example, a couple who ran up excessive credit card debt then paid off the cards with a second loan against their home equity. Or a commitment to buy something on installments, and planning to use a Home Equity Line of Credit to make the payments, then their bank freezes their HELOC when home values decline.

Let's say a family is going to operate on a level of "X" in total amount of credit. There are just a handful of primary sources of credit to turn to, in assembling the total of "X" credit amount:

• First mortgage for home value beyond cash available for downpayment
• Second mortgage for home improvements or other purchases
• Home Equity Line of Credit for various expenses
• Credit cards
• Automobile loans.

A family could rely almost entirely on just one of these, or two of them, or spread out the credit evenly across all of them. And each of these credit sources has its own strengths and risks.

This is like a "credit-portfolio allocation." And my point is, I believe a family should manage the overall mix in coordination. For example, I know more than one couple who could have sold their home and walked away, had they not placed too much credit burden on their home. As it is, they must involve their lenders in allowing short sales. That may be worse than having a pile of car loans or credit card debts. At least you can rather readily sell a car to cancel a $20,000 debt. But it can be much harder to sell a $150,000 house to wipe out payments on $20,000 in debts.

I recommend that a family get used to a joint long term plan for total debt owed. Then maintain a comprehensive plan of coordinated debt allocations. This should make it easier to have exit strategies, disaster plans, and interest-minimization procedures in place.

This just seems so obvious. Why didn't I ever express it that way before? But in the press, anyway, we hear so many stories about any one of: credit card debt, or mortgage defaults, or auto-loan delinquincies, etc. as if they are independent topics. When in fact they are, or can be, intertwined in a coordinated portfolio of debt "outvestment" allocations (vs. investments).

Just my 2c. What are your thoughts?