Pay down HELOC or credit card first?

stevieboyMay 2, 2006

Hi,

I have:

$95,000 on a HELOC at 7.5%

$12,000 on a 0% credit card (the 0% runs out in February 2007, then goes to 12%)

If I had about $5,000 to throw at one of those, which is the better option?

Thank you.

Stevieboy

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tulips

My suggestions is to get rid of credit card debt 1st. HELOC interest is tax deductible. It will be February 2007 before you know it. You can play the credit card game but that takes a lot of diligence and, if you are even one day late on a 0% credit card debt, your interest rate will skyrocket close to 20% or more.

    Bookmark   May 2, 2006 at 1:08PM
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stevieboy

Thanks tulips.

I think you're right, but my only reservation is that times are tight and I'm kind of using the HELOC as my cash reserves. So, I'm thinking it would be nice to have more of a cushion in that reserve.

Any thoughts (other than thinking I'm crazy for using a HELOC as emergency money)?

Stevieboy

    Bookmark   May 3, 2006 at 3:16PM
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richard_f

Your credit card can also serve as an emergency cash reserve. Pay it off first, and think about ways to restructure your expenses so that you're less likely to need to use either.

    Bookmark   May 3, 2006 at 3:42PM
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joyfulguy

Steve,

Are you maxing out on your HELOC, or is there more available on it?

I assume that it's based on the value of your home.

If the value of your home increases, perhaps you can arrange some increase in limit. Which might not be adviseable, as a number of knowledgeable analysts believe that current house prices in at least several areas of the U.S. are much too high - some are using the term, "bubble". Could a rather drastic revision in your area be in the cards?

If it decreases, no doubt your lender will be reducing the maximum that you can draw. Which will quite likely include that, should your maximum reduce to below what you've drawn, the lender will want to see some immediate money.

You haven't said anything about whether, in the ordinary course of things, you are planning to have the "credit" card balance paid off by the deadline on the 0% rate.

Or whether, going into emergency saving mode, you could manage to do so - or about how willing you (and your family?) might be to alter your current lifestyle so drastically.

I assume that the (currently non-existent) interest on the "credit" card debt isn't deductible.

What are the chances that you could roll the credit card debt into another 0% program sometime between now and the deadline?

I assume also that you have committed to adding not another cent to that balance owing between now and then.

I feel rather uncomfortable with your suggestion that you are looking at " ... throwing around ... " what appears to many of us a substantial amount of money, namely $5,000.

Do you frequently " ... throw (money) around ... "?

Not that that is any of my business, whatsoevr.

But for a number of years as a personal financial advisor I sought to convince my clients to use money wisely - making it work for them, rather than someone else.

Just my $0.02.

ole joyful

    Bookmark   May 3, 2006 at 5:41PM
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stevieboy

Joyful,

Thanks for the thoughtful reply.

I do hope to either pay off the credit card balance, or reduce it significantly by the end of the 0% period. Changing our lifestyle isn't so easy (as I'm sure many people feel) since our costs are fixed and necessary. Mortgage, childcare, commuting (no car payment thankfully!). One thing we probably could reduce is our whole life insurance and convert everything to term, but then I feel like we're just throwing money away. At least with whole, you have something to show for it at the end (we're not agressive investors so it's unlikely we'd invest our money more succesfully than our insurance company if we dropped the whole life).

Sure we could sell our modest house (1500 sq ft) and find something smaller and cheaper in another town, but we bought into a good town. It would be hard to leave, and I'm not going to let (pesky) money take that away from me. I'd rather live a happy life and die with debt.

I have, indeed, committed to not charging any more money on the 0% card. It was simply a way to escape high interest cards.

Regarding "throwing" money... it was just an expression. No, I don't normally throw money around because I don't have that much extra to throw. But I happen to have a small reserve now that I can use to bring some debt down a little.

Stevieboy

    Bookmark   May 3, 2006 at 10:52PM
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joyfulguy

I have my biases.

One of them is against whole life insurance.

Remember those supposedly valuable "cash values"?

The only way that you can acces them (apart from policy loans, in which case you pay interest to use your own supposed savings) ...

... is to cancel the policy.

In which case the death benefit disappears.

If you carry it until your death and your heirs/estate receive the proceeds ...

... the supposedly valuable cash value disappears.

Have you found a way to have your cake and eat it, too?

In the case of your death, a term policy for the same face amount would have paid the same amount to the people for whom you have felt the necessity to provide a replacement income.

At a much lower cost - in the early years. When every dollar counts, more than later (if you're careful in the way that you use it throughout - making it work for you rather than the other guy).

Good wishes as you make your plans.

ole joyful

    Bookmark   May 4, 2006 at 1:28PM
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alphacat

Pay off the HELOC now; then when the 0% rate on the credit card is about to expire, pay off the whole credit card from the HELOC.

That seems like a no-brainer to me: you're choosing between 7.5% interest and 12% interest. The HELOC may or may not be deductible, but it's cheaper either way.

The only tricky bit is if you can't increase the HELOC by the whole of the credit-card balance. In particular, it might be that if you pay the HELOC now, you can't get that money back again. In that case, what to do would depend on the particulars.

    Bookmark   November 27, 2006 at 12:10PM
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