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paying credit cards with home equity... does it work?

Posted by on Dec. 12, 2012 at 7:17 AM
  • 14 Replies

 Pay down your credit cards with a home equity line of credit

The strategy:
Use a home equity line of credit, home equity loan or second mortgage to pay off outstanding debt.

Does it work?
It depends. "People who have a home equity line of credit will use it to pay off their credit cards and think that's going to raise their scores," Walzak says. The problem is that they aren't paying off debt or changing their utilization ratio, they're just moving debt from one place to another.

On the other hand, you may succeed in improving your credit score if you take out a new home equity line of credit or loan to pay off other debts. That's because you'll be increasing your available credit and thus lowering your utilization ratio and because the FICO credit scoring formula looks at how you handle a mix of different kinds of debt. However, keep in mind that lenders look at more than just your score, they look at how much debt you're already carrying, so this tactic may actually impede your ability to get credit.

Possible drawbacks: With either approach, you're giving up equity in your home and trading unsecured debt for secured debt, which, if you ever run into financial trouble, can backfire on you if you ever have to file for bankruptcy. And with your credit cards paid off, you may be tempted to run up their balances again, which would leave you worse off than when you began.

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by on Dec. 12, 2012 at 7:17 AM
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Replies (1-10):
mckinneymom918
by Member on Dec. 12, 2012 at 9:08 AM
Another upside could be that the interest on the debt could be deductible in a home equity line situation. But the total debt on you house may not exceed the value. Be sure to consult your tax advisor :)
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michiganmom116
by on Dec. 12, 2012 at 9:33 AM
1 mom liked this
We've done it in the past. HELs often have a MUCH cheaper interest rate than credit cards, often saving thousands of dollars in interest. Key is: cut up your credit cards or else don't use them or you'll be back in the same boat but with an additional loan payment now.
cjsmom1
by on Dec. 12, 2012 at 9:43 AM
I completely agree with cutting up the cards. You don't want to pay them off just to run them up again.


Quoting michiganmom116:

We've done it in the past. HELs often have a MUCH cheaper interest rate than credit cards, often saving thousands of dollars in interest. Key is: cut up your credit cards or else don't use them or you'll be back in the same boat but with an additional loan payment now.

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suziejax
by on Dec. 12, 2012 at 11:56 AM
1 mom liked this

I am not so sure I would do that and I have no cards now anyhow 

MamaBear2cubs
by Nikki on Dec. 12, 2012 at 1:43 PM

TFS

QuiltLover
by Jocelynn on Dec. 12, 2012 at 4:07 PM

Here is my take on it. It isnever a good stategy to borrow money to pay off borrowed money....It took you a while to acquire  the debt, so just suck it up, pay off one card at a time and not add any more debt. Once you "borrow" money to pay back borrowed money, it frees you up to get back in the hole again....Do it the old fashioned way, pay it off as you can and don't own a credit card.

baconbits
by on Dec. 12, 2012 at 4:33 PM

 Do not take out a home equity loan to pay off credit cards. If something happens then they can take your home. If your credit card debt is high it's better to try and get a personal loan to pay them off. I did this with mine because they jumped my rate from 6.9 to 24% and that was because I was 2 days late. One time in 15 years. Calling did no good so I talked to my credit union and they gave me the loan as long as I cut up the card in front of them and cancelled it on the phone with them there. No problem! The fantastic part is that in 4 years I'll have it paid off instead of the 15 and my rate is only 4.5%!

Do not get the loan and keep the cards thinking you'll only use them in an emergency. There's always an emergency. Instead try and put just $5/$10 a week into a savings account for emergencys. Cut them up! If you're having trouble paying them now CUT THEM UP!

yvonne37
by Yvonne on Dec. 12, 2012 at 5:41 PM

 exactly.

Quoting QuiltLover:

Here is my take on it. It isnever a good stategy to borrow money to pay off borrowed money....It took you a while to acquire  the debt, so just suck it up, pay off one card at a time and not add any more debt. Once you "borrow" money to pay back borrowed money, it frees you up to get back in the hole again....Do it the old fashioned way, pay it off as you can and don't own a credit card.

 

----- Visit my CafeMom homepage at http://www.cafemom.com/home/yvonne37
jbyrd898
by Jessica on Dec. 13, 2012 at 7:35 AM


Quoting mckinneymom918:

Another upside could be that the interest on the debt could be deductible in a home equity line situation. But the total debt on you house may not exceed the value. Be sure to consult your tax advisor :)

this is a great point. I've been thinking about taking an equity loan to pay off some credit cards and this is one of the major advantages.

baby
sparkyco2
by on Dec. 13, 2012 at 8:38 AM

i completely agree about cutting up the cards, the point is to get out of debt fast or i mean those high interest CC debts.....   another thing to remember is that when you use up your HEL of credit for CC debt once it is gone it is gone so if you need a major improvement like a new roof, furnace you can't take out a second HEL of credit...... i believe the HEL should be used very very wisely.

Quoting michiganmom116:

We've done it in the past. HELs often have a MUCH cheaper interest rate than credit cards, often saving thousands of dollars in interest. Key is: cut up your credit cards or else don't use them or you'll be back in the same boat but with an additional loan payment now.


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