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A few years ago when housing prices kept going up and up and up, many homeowners turned their houses into piggy banks. Or so they thought, from the way they kept pulling money out of the houses in the forms of home equity loans.

Every time homeowners wanted something but didn’t have the money to pay for it, they just turned to their cash machine – the bank. Expensive new SUV, jet ski, swimming pool, spa, new furniture, remodel of the house…don’t have the money for it? That’s okay,  borrow against the home equity.

What they found out was that they’d made a terrible mistake. Their homes were not piggy banks. They were credit cards. And now the homeowners still owe the money, on houses which are worth far less these days then the outstanding mortgage and home equity loan.

What can debtors learn from this?

Never borrow unless it’s for an emergency, and don’t spend what you don’t have. A true emergency is when your lights are about to be turned off or you have no money for groceries – and no way to earn money for groceries. Wanting to go on a vacation is not a real emergency.

Borrowing puts you in an extremely vulnerable position, because as we’ve found out these days, nothing is certain. It is not certain that homes will always hold their value, it is not certain that once-steady jobs will always be there, it is not certain that education and the willingness to work will keep you employed.

So learn from all of those who are now losing their their homes because they borrowed against them, and every time you consider putting something on credit, ask yourself if it was worth it.

When should you start taking action about your debt?

The best time to do it is BEFORE you even get in debt, of course. How do you do this?

Several ways:

By setting aside a percentage of your paycheck in an interest earning “rainy day” account EVERY single month, so that when the inevitable emergency strikes – medical issues, layoffs, business folds, etc. – you are prepared.

By only buying what you can afford – and by refusing to run up credit card debt to buy things that you can’t afford. If you can’t afford something right away – save up and pay for it all at once.

By only taking out loans for things that you truly need, like a house (that is affordable for you!) or a car or a student loan. And by shopping around for the best deal, and never taking out an adjustable rate mortgage loan.

By keeping a good credit rating so that if you DO have an unavoidable financial crisis, you can pay for it if necessary. Do this by having at least one credit card, and paying it off on time every single month, with perhaps a VERY small balance carried over every month. Also, make sure that you only charge about 20 or 30 percent of your available credit, monitor your credit report constantly for identity theft, and don’t apply for credit at a whole lot of places at once.

If you do all of these things, you will be prepared when a financial crisis hits. Everyone has one at some point or another – the roof leaks or a tree falls on your roof, or a hurricane sweeps through town and your insurance company doesn’t cover what they should, or you or a loved one become ill and run up huge medical bills…

But the people who come through their crisis relatively unscathed are those who have been preparing for it all along.

You may be afraid to access your credit score out of concern that doing so will lower your score, but this is a myth.

It is true that too many inquiries by creditors will lower your score, but it does not lower your score when you make inquiries yourself.

The reason that it lowers your score when loan companies make inquiries is that it sends a signal to the credit scoring company that you are about to take on more debt.

That’s why it’s not generally a good idea to apply for a department store credit card just to save 10 percent on your purchase – because it will lower your credit score, which may end up costing you more in the long run.

When you check up on your credit score, it is considered a “soft” inquiry which does not affect your credit.

When a prospective employer checks on your credit, or when credit companies check on your credit without checking with you first (say, if they want to offer you a loan, or a free cell phone), that is also a soft inquiry.

When you apply for a loan, for a cell phone plan, for a new car, for a mortgage loan, THAT is a “hard inquiry”.

Sometimes it is necessary to apply to for credit, but never do so casually and try to limit the number of places that you apply for credit with.

Common sense would tell you that if you are trying to fix your credit score, you should cancel your credit cards, right?

Unfortunately, wrong.

This hurts your credit score, and in more than one way.

Credit scoring companies examine your credit history, and they want to see older lines of credit because they want to know how you handle credit. If all of your lines of credit are brand new, they feel they don’t know enough about you and your history and are going to view you as more of a risk than someone with a long, well established line of credit.

Also, it reduces the amount of credit that you have available. That seems like a smart thing to do, right? Not in the eyes of the credit scoring companies. They want to see that you have charged no more than 30 percent of your credit limit (for a perfect credit score).

Okay, so how about never charging anything? That should be a smart money move, right?

Again, what’s good for you and your wallet and your budget is not necessarily good in the eyes of the credit scoring company.  If you never charge anything – they don’t know what kind of credit risk you are. The ideal solution is to charge, but to pay off your balance every month, on time. Or at least pay off most of your balance.

Okay, so if charging nothing is bad, then you should charge a lot, right? Only if you can pay off most of it and if you don’t charge too close to your credit limit. If you have a $10,000 credit limit but have charged $9,000, this will severely hurt your credit score.

The best thing to do to get a good credit score is have a couple of credit cards that you pay off every month, on time, and that you do not close. Let those credit cards age, keep your balance low, pay your bills early or on time, and you will be the golden child in the eyes of credit card companies.

In times past, when the economy was good, the conventional advice was to make paying down credit card debt and other high interest debt as fast as possible.

That advice has changed somewhat these days.

The unemployment rate is the highest it’s been in decades, and layoffs, hiring freezes, and wage cuts are the rule of the day.

These days it makes sense to have, as a first priority, enough of a savings cushion to pay off at LEAST six months worth of bills – mortgage or rent, phone bill, car payment, insurance, groceries, utilities, a couple of hundred dollars a month for emergencies, and any other bills that might come up.

You should still strive to pay more than the minimum on your credit cards and other high interest loans, even if it’s only $10 or $20 more than the minimum. But most important is making sure that you can keep a roof over your head, the lights on, and food on the table if you are laid off or, worse, if you and your spouse are laid off.

So it makes sense these days to sit down and calculate how much you would need as a minimum to support yourself for at least six months if you lost your job…and put as much money into your savings account every month as possible. When you reach the amount that you decided on, THEN it makes sense to start aggressively paying down your credit card debt – but not before.

To get out of debt, you need to figure out what got you into debt in the first place.

Even if you are in debt because of a medical issue, a layoff, or other unavoidable life catastrophes, there is almost always an underlying issue which caused you to spend money where you shouldn’t have, which means you didn’t set aside enough money for emergency savings.

Do you spend too much on your family? Do you buy lavish gifts, pay for private lessons, splurge on expensive vacations? You need to realize that doing so is ultimately hurting your family, not helping them. If you don’t have a year’s worth of emergency money set aside, and a healthy chunk of money going into your 401k and your children’s college fund every month, you CAN NOT afford any extra spending.

Do you spend money try to impress others? If so, when you are laid off or your mortgage resets or you are laid off or your company goes out of business, are those “friends”, neighbors, et cetera, going to pay your bills for you because you spent all your money and have no savings? Highly unlikely. You need to put your needs and your family’s needs FIRST before you buy expensive toys or a house you can’t afford or a Hummer instead of a VW.

Do you spend money to feel better about yourself, to fuel some inner need? If you can’t stop yourself and rein in your spending, you might want to seek counseling so that you can find healthier methods of rewarding yourself.

Do you spend money to impress a significant other? Keep in mind that if you want a long term relationship to be successful, you need to be financially compatible and you need to be honest with that person. Spending money that you can’t afford is not being honest. If they will only stay with you as long as you are spending money you don’t have, you’re going to run into problems sooner rather than later.

So if you are in debt, you need to examine what caused you to be in debt in the first place if you are ever going to truly get a handle on your finances.

The credit card companies are getting sneakier than ever in their attempts to squeeze every last dollar out of consumers – but you don’t have to fall for it.

You do need to remain vigilant these days to catch credit card companies when they try to pull a fast one, however.

Many credit card companies, for instance, are lowering credit card spending limits, even for customers with great credit and great payment histories.

Why is this bad?

Because if you charge too much and get close to your credit limit, this hurts your credit score.

Let’s say that your credit card company promised you a $10,000 credit limit. You charged $3000. That is not a problem for your credit score; it is recommended that you charge no more than 30 percent of your credit limit.

But then, let’s say your credit company suddenly slashes your credit limit to $3100. You have now charged almost the maximum amount of your credit limit.

This will send your credit score plummeting, through no fault of your own.

And furthermore – OTHER credit card companies or lending institutions may suddenly raise your interest rate and charge you more every month, because your credit score dropped! That’s another sneaky trick they’re pulling these days.

They also may change your credit payment cycle and make it shorter – it’s never changed in your favor! So instead of 31 days you may have 28 days to pay off your bill. This increases the chance that you will pay late, so they can then hit you with huge fees and jack up your interest rates.

You need to read all mail from your credit card company immediately and read through it thoroughly, because they are required to notify you when they make changes.

If you have been a good customer and have always paid on time, try to negotiate with them. And if they refuse to cooperate, it is most likely time to seek out another credit card company.

Once upon a time anyone with a pulse could get a credit card. ANYBODY. Or anything. There were news stories about credit companies mailing credit cards to people’s dogs, and to infants, and to deceased people.

As homes soared in value, people were able to take out easy home equity lines of credit as well.

People bought gigantic television sets with this easy credit, and jet skis, and yachts, and expensive cars and motorcycles, and lavish vacations, and designer wardrobes, and Rolexes.

In other words they bought expensive toys on credit, back when money was flowing freely and interest rates were reasonable.

Now banks are facing record numbers of loan defaults. As people lose their jobs or their spouses lose their jobs or they face pay cuts, they can not pay off their credit card bills or home equity lines of credit.

Easy credit, and the banks, were not their friends. They were a trap that led these people to believe they could spend and spend without consequence.

When people can not make their payments on times this is reported to the credit agencies, and scores plummet. Then, when people want to take out loans for things which really are necessities – a car or truck, a home loan, a student loan – it is near impossible to do so.

A bad credit score also makes it difficult to refinance and get lower interest rates on existing loans.

The fact that it is now difficult for many people to get easy credit is not necessarily a bad thing. It means that people need to save up and pay for things in cash, or not buy things that they can’t afford.

So by all means work on improving your credit score, but don’t make it your goal to get new lines of credit and increase the amount you can borrow. Instead, think of how much trouble easy credit has caused for you and for many others in the past, and make it a goal to live within your means and delay purchases, and to use as little credit as possible.

A while ago, the book “The Millionaire Next Door” was on the top of all the bestseller lists.

But if you’re deeply in debt, what can you learn from a millionaire? Plenty. Most people who became millionaires have sensible financial habits, which, if you follow them, can lead you out of debt and on your way to building a healthy financial future.

Among these habits that are shared by most people who have become millionaires:

NEVER go into debt because you worry about appearances or keeping up with the Joneses. Note: this doesn’t meant that personal appearance or grooming doesn’t matter, or that maintaining a decent standard of living doesn’t matter. It means that you should only pay for what you can afford, and you shouldn’t try to compete with others for appearances’ sake. You need a watch; you don’t need a Rolex. You need a car or truck; you don’t need a Hummer or a Merecedes Benz. You need to get regular haircults; you don’t need to visit the best salon in town.

Keep a budget and know where every penny goes.

Set specific, realistic goals and do whatever it takes to meet them. Pay your bills, then create categories for savings, for investing in a business if you have one, for special occasions, et cetera.

Buy quality used items rather than new.

Don’t be afraid to bargain, negotiate, and ask for what you really want. As they say “If you don’t ask, you don’t get”.

Millionaires are not generally the people driving the Hummer to their mortgaged McMansion, dripping with gold jewelry. Those people usually are living on credit and these days, on the verge of losing everything that they own. Millionaires plan, and save, and don’t live their lives to impress other people.

And if you start doing the same, you will much more quickly find your way out of debt, and on your own path to financial success.

Trying to get out of debt without a well thought out plan is like trying to find your way through a city that you’ve never been in before without a map.

There are certain steps that everyone must take if they want to get out of debt and stay out of debt.

First it’s important to get a true, accurate picture of your finances. You must figure out exactly how much you owe, what your minimum monthly payments are, and what your fixed monthly expenses are – including mortgage, electricity, car payments, transportation, rent, student loans, groceries, and any other necessities. Be sure to allow for clothing, entertainment, gifts – don’t be lavish, but don’t ignore that spending category completely.

Also allow for a little bit of savings. Even if you can only set aside $50 a month, it’s better than nothing and it gets you in the savings habit.

Then, figure out how much money you have coming in every month. There’s certainly a chance that you may owe more than you earn. If this is the case, you have two choices: find a way to earn more money, most likely by working a second job part-time for a while; or negotiate with your creditors to get lower monthly payments. It is possible that you may need to consult with a non-profit credit counseling agency. Make sure that they truly are a non-profit agency before you consult with them however.

Also make sure that you figure out how long it will take you to repay all of your debts and that there is an end in sight.  It will motivate you to actually repay your debts and to know the date that you will be debt free; this is one of the most important parts of your debt planning process.