Home Equity Loan to Pay Credit Card Debt

klofcircleJanuary 5, 2006

Over the last few months, due to some unforseen circumstances, my credit cards balances have managed to get very high relative to my income -- upwards of $20K. However, I am in process of buying a new home and I have been told that I could take a home equity loan once I close on the house for the amount of my debt at a rate of 6% to free up some cash on a monthly basis -- much needed with the baby on the way and the increase in monthly expenses.

Question: Would it make more sense to continue to open up 0% cards and transfering the balances from one to another for the next 4+ years or should knock it all out with one loan at a higher rate that I could spread over a 10yr period to reduce the payment?

Apparently, this is pretty common. Just lookin for some reaction/comments/experience. Thanks in advance!

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mary_md7

Unless you are 1000% (yes, that's one thousand) percent sure you can make every single payment on time, do not, I repeat DO NOT put your home at risk to get rid of credit card debt.

You would be better off not buying the home yet, and using what otherwise would be downpayment $$$ to get rid of the credit card debt, then buy after saving up a downpayment for another year or two.

    Bookmark   January 5, 2006 at 12:12PM
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joyfulguy

You have a high debt on "credit" (really "debt") cards relative to your income.

That is, you spent more than you made, earlier.

Including some unexpected expenses.

Most financial advisors recommend that their clients have enough easily available assets to keep them floating should they have ***zero*** income for 3 to 6 months.

You've just gone into substantial debt to cover current expenses.

And you are going to take on a large-sized debt, buying a home.

One which you'll be required to make payments, regularly. At least monthly, some arrange bi-weekly.

And - you plan to spread making payments on that debt that you incurred recently over ...

... (run that by me again) *ten years*???

And you're going to be taking on a major source of further expenditure soon in the form of offspring?

The rule of 72, which says that if you divide your rate of interest into 72, it'll tell you how many years it'll take that amount to double, will tell you that, during those 10 years, you'll have paid about $18,000. - almost an additonal $20,000. - in interest.

Think of all the other worthwhile things that you could do with a good chunk of that $18,000. or so on interest, should you be able to save it by paying off the debt a whole lot more quickly!

Really important that you subject yourself to the discipline of paying off the debt much faster than that, it seems to me.

Good wishes to you and yours for a great New Year.

ole joyful

    Bookmark   January 5, 2006 at 4:36PM
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keck

Do NOT get the home equity loan...do the 0% instead. If for some reason something happened down the road and you couldn't make the payment the bank would foreclose, but if you couldn't make your credit card payment you would have options that let you keep your home. First USA is offering 3.99 for life for balance transfers...you have to be sure to pay ontime for that and my guess is not everyone would qualify for the 3.99%.

    Bookmark   January 5, 2006 at 11:27PM
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dgmarie

It would seem to me a person in your shoes should NOT be buying a home, especially when it sounds like you cannot afford (or do not have the liquidity) to make ends meet at the end of the month. Plus children are expensive, and I fear your credit cards will run through the roof. I agree with joyful guy, this sounds like a train wreck. Being woefully in debt and risking a home is not a good idea.

    Bookmark   January 5, 2006 at 11:51PM
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steve_o

Opening yet more credit cards isn't going to do wonders for your FICO score, either. Get the cards, pay them off ASAP, and then think about filling a house with kids. :-)

    Bookmark   January 6, 2006 at 8:17AM
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joyfulguy

We have several large signs beside our superhighways that say,

"Tailgating kills ...

... Leave some space".

Someone complained, saying that it wasn't the tailgating that kills - it's the wreck at the end.

Which could have been avoided - had the one who bears major responsibility for the incident (it wasn't an "accident") not tailgated in the first place.

Tailgating may not kill - but it sure builds in a great increase in risk.

That I'd prefer to avoid in the first place.

As a financial advisor for some twenty years, I've told many that managing money has some things in common with driving.

In driving, we need to be watching what's going on a quarter of a mile ahead, to anticipate what bad things might happen so that we have more lead time to attempt, at least, to avoid them.

Which can frequently be done successfully.

Planning a few years ahead (up to most of seventy-five!) sure helps when one manages one's money. as well.

Plan well for a gorgeous New Year, everyone.

ole joyful

P.S. Actually, actions you've taken in earlier years may well have a great bearing on how well your New Year turns out currently, in a number of areas, I'd say.

My family has a history of weakness of lungs.

I started to smoke at age 16.

At age 16, liking neither the taste not, being frugal, the cost - I quit.

Now at age 76 and enjoying good health - I'm mightily glad that I had the common sense to do so, 60 years ago.

The exercise of common sense frequently pays worthwhile dividends.

o j

    Bookmark   January 7, 2006 at 4:42PM
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jlhug

One of the biggest problems with any scheme to pay off credit cards by using more credit is most people do NOT change their spending habits. The average consumer will take out a home equity loan to pay off outstanding balances and then only 2 or 3 years later find themselves with a home equity loan and credit cards at their max again. That doesn't solve the problem; it makes it worse. Plus there is the potential to lose you home if you fail to make payments on the home equity loan. In my humble opinion, this is not the best solution to your problem unless you and your significant other make some changes in your spending habits.

Switching from one low/no interest credit card can be very damaging to your credit score. One of the components of a credit score is how long your current accounts have been open. Longer is better. New credit cards every 6 months will lower your score which means you pay higher rates or cannot qualify for those "teaser" rates. Also, be aware that the teaser rates will escalate very rapidly if you are ever late with a payment.

The solution that I suggest to the personal financial management classses I teach is to stop using credit cards for any daily expenses. Save them for emergencies (a death in the family, an earthquake destroys your house, a hurricane is coming and you have to evacuate). Concentrate on paying off one card by paying extra on that card every month but continue to make the minimum payments on every card you have. When that card is paid off, apply that payment to the next card until it is paid off.

If you have trouble avoiding temptation with credit cards, put them in a ziplock bag and seal it. Put that bag in another bag and fill it with water. Put both bags in the freezer and leave it there. Anytime you need a card it is available, but you have to wait to thaw it out to use it which means you have time to think about whether or not you really, really NEED what you plan to purchase with credit. While it sounds "dorky" and simplistic, it does work.

Good luck

    Bookmark   January 9, 2006 at 10:14AM
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talley_sue_nyc

the advent of microwave ovens may have diluted the power of the "freeze your credit-card spending" technique.

But it't still worth it--you'll have to think. And, most likely, you'll have to go home first and get it out of the freezer.

I like the idea of freezing your CC purchases, and setting up an automatic payment plan of SOME sort--pay bare minimum on all of them, but pick the card with the smallest amount of money, and pay extra on it until it's gone; then shift that amount to the next-smallest card.

As you eliminate cards, the amount of money going toward payoff will be larger each time.

You'll have to pay SOMEBODY for that credit card debt--as long as you're not adding to it, you might as well pay a credit-card company--though I really like that 3.99-for-life deal, if you can get it.

Good luck!

It CAN be done. I didn't have to dig out from under $20k--just $5k. And I did. By zeroing my spending. Which was really good for me, bcs it refocused my idea about debt, and *stuff* and energy, and spending.

But...it is hard. My CC debt was $0 for 2 years or so, but it has crept up to $1,000 again. Mostly from mail-order shopping for necessities, but I lost some of the discipline of knocking it back to zero every time. I hope to wipe it back out in the first half of the year.

By zeroing my discretionary spending and heavily guarding the nondiscretionary stuff. Bcs not only does this keep new charges from building up; it frees up funds to pay for the old expenditures.

    Bookmark   January 9, 2006 at 10:38PM
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joyfulguy

Hey, circle,

what does the "klof" mean?

"Keep Learning Of Financing"?

The tuition on one's learning about the perils of so-called "credit" - really "debt" - card debt is real high.

On major cards - usually about $18.00 annual rate per $100. borrowed.

On store-issued cards - how about (usually) $25. - 28. annual rate per $100.00?

Assuming that $100. were to run for the whole year (but if you make minimum monthly payments, you'll be surprised at the balance owing after that one year, I'll bet).

By the way - should you roll your current debt into one of those "low rate for a few months" cards - don't make any new purchases on it, for on most of them, the low/0% applies only to the balance transferred, and monthly payments go entirely to pay it off first.

So - after whatever number of months that they offer the low rate on, the total payments having gone to pay off the amount that you transferred - much of your current account will be at the usual rate of interest.

So - make no new purchases on that account after the transfer.

If you don't make your money work harder for you, who will?

They won't!!!

Have a great week.

ole joyful

    Bookmark   January 10, 2006 at 4:48PM
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lostinit

Take it from me. Do not get any loans, focus on paying off your credit cards with any funds you can as soon as possible. I bought a home with modest credit and I had a child, now I am currently chucking a total of $720/month on five credit cards, money that could be going to a college fund for my child, home repairs, emergency funds.

If I were in your shoes I would forego buying a home and pay off as much debt as you can while you can.

    Bookmark   June 13, 2010 at 6:10PM
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maifleur01

The original post was from 2006. Hopefully the OP has already settled the problem or more likely is deeper in debt.

Joyful I like your postings but?

    Bookmark   June 13, 2010 at 10:20PM
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joyfulguy

" ... but?".

What?

ole joyfilled

    Bookmark   July 3, 2010 at 4:27PM
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