If you’re like most Americans, you have some sort of credit card debt. Many people ask, “Should I take out a home equity loan to consolidate my credit cards?” Before you make a final decision, consider the following factors.
If you’re like most Americans, you have some sort of credit card debt.
If you’re paying upwards of 10% and even 20% on those credit cards,
then chances are you aren’t making much headway when it comes to paying
them off.Turn on any TV or pick up any newspaper and you’ll
find the home equity loan or HELOC (home equity line of credit) market
is directly targeting consumers strapped with high-interest credit card
debt.The upside? Most home equity loans or HELOC’s run between
7% and 9%, a much better rate than the 18% to 21% of store credit
cards. This alone could save a consumer hundreds to thousands of
dollars over the life of a balance. Up to $100,000 of home equity loan
interest payments are tax-deductible. Minimum payments are usually
lower, and principal is paid down much faster.The downside?
Your debt is now tied to your home. If you default on the home equity
loan or HELOC, you could lose your house. For anyone with even a slight
tendency towards undisciplined use of credit cards, consolidation
through home equity may be disastrous. There are usually closing costs
associated with these types of second mortgages, so don’t forget to
subtract those amounts from any interest saved. Before you make a final decision, consider the following factors.How
much will you actually save on interest? There are a multitude of
financial calculators on the internet to help you determine what you
will pay in interest over the lifetime of a credit card balance.
Compare this to what you will pay with a HELOC or home equity loan.
Don’t forget to factor in closing costs such as loan application fees,
appraiser fees, mortgage filing taxes, etc. How much do you
owe? The general rule is to consolidate at $10,000 or more, but simply
transfer to cards with lower fixed rates if your balance is less. If
you have reasonable credit, you can usually find credit cards with
lower fixed rates and transfer your balances. Even if you have to
re-apply for new cards every nine months to a year, it will be worth
the effort.What caused your credit card debt to begin with? If
it was a one-time expense such as college tuition, medical emergency,
job loss or wedding—and you’re generally good about living within your
means—then debt consolidation is probably an excellent option. If
your credit card debt stems from trips to the mall, a big-screen TV, a
cruise and lots of other stuff you don’t even remember, then chances
are consolidation is NOT a good option for you. Regardless of your
balance, you’ll be better served transferring balances to lower-rate
cards. Regardless of what you decide, make sure to read the
fine print on all home equity or credit card offers. Look for fees and
closing costs, and factor them into your decision. Avoid the urge to
“medicate” your debt pain by making hasty decisions. Take a few days to
mull over offers you’re considering.Either option will save you
money and start you down the road to debt freedom, so examine your
options, make your decision, and get started!
A financial educator for over ten years, Leo Quinn Jr. specializes in
helping people get out of debt and stay that way. His “How to Own Your
Paycheck Again” program has helped thousands of families improve their
finances and escape the debt trap. Learn more at www.OwnYourPaycheck.com.
