January 16th, 2009
Paying Credit Cards with a Home Equity Loan
The majority of all citizens in Americans are carrying some kind of credit card debt. Unfortunately, there are so many of us that are carrying such a high amount of debt at high interest rates that we cannot pare down the amount that we owe, even when we send payments to the credit card company on time every month. Falling behind only makes the situation even worse, especially when you begin to consider late fees and finance charges which begin to appear on subsequent statements. More often than not, a single late payment can result in a significant hike to your interest rate. High interest rates begin to add up quickly, and can result in even higher monthly credit card payments, making them do even less to help you reduce your credit card balance. This cycle is vicious and it can be difficult if not impossible to get yourself out of.
One effective solution that may allow you to get off the credit card roller coaster once and for all is to obtain a home equity loan, using it to pay off the high interest credit card debt that you are struggling with. Homeowners can take out home equity loans for a variety of purposes including making home improvements, but why not take a home equity loan out to eliminate your high interest debt instead, making it easier for you to deal with your month to month expenses?
Benefits -
There are a number of benefits that come with credit card refinancing, including a decrease in the interest rates that you are paying. The other primary benefit comes from the fact that you will not be incurring any more debt when paying your credit cards off with a home equity loan, because you are keeping the amount you owe the same, and are moving the debt to a repayment method that is more affordable. If you had previously been fighting to keep all of your payments up to date every month, using a home equity loan to pay your credit cards off will essentially effectively consolidate your debt, making it much easier to pay off over time by allowing you to pay one single loan instead of several.
Here are some of the additional benefits associated with refinancing your credit card with a home equity loan:
- Elimination of variable interest rates by getting a fixed interest rate.
- Potential tax benefits with interest rate write offs on home equity loan interest.
- Consolidation of a number of payments into one single monthly payment.
- Lower monthly payments associated with longer terms and lower interest rates.
- Easier record keeping.
- The ability to write and mail a single month rather than numerous for easy tracking.
Once you pay your credit cards off, put them away and do not use them unless you absolutely have to.
Caveats -
The major downside of this approach is that you are now using your home as collateral for your credit card debt. Should you have a a financial emergency, you could run the risk of losing your home from credit card debt.
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The only time you actually run the risk of losing your home is if you default on your loan payment. The benefit of consolidating all of your debts into one lower monthly payment should help offset the risk of default. However, if you’re concerned about it in an uncertain economy, most banks and credit unions offer a payment protection plan that is relatively low cost for the benefits.
Credit life and disability (which is known by several different names per institution) is something I always recommend to have put on a loan. I work for a credit union and the story I always tell is that of a coworker who didn’t have that protection on her loan. She and her husband purchased a brand new truck and failed to put the payment protection on the loan. Not even a week later, her husband (and primary breadwinner) passed away from a heart attack. She was stuck with the payments on this vehicle and not enough life insurance to cover their debts. She struggled tremendously. What this protection does is cover you in the event something like this happens. You can get the life coverage, which in most instances will pay off the loan in the event the covered borrower passes away. The disability coverage will pay up to 6 months (depending on institution)of the loan if you are injured at work or any other stipulations that fall under the guidelines in the coverage policy. So, if you’re concerned about using your home as collateral, but realize it would be of benefit to you, inquire about the payment protection.
Isn’t the big question here whether you’ll charge up the cards again once they are paid off? If not, it seems that using a home equity line is a good choice, assuming the interest rate is a lot lower than on the credit card. But if you end up charging the cards up again, you’ve put yourself in a worse position.