When you carry significant credit card balances, you will be shocked by how quickly interest can accumulate on that debt. It may seem like you can never get out from under it, and you might look for other ways to shift the debt around. Taking out a line of credit secured on your house is one way to do this, but it has consequences, and you should consider carefully before you take this step.
The first step to take before you consider how to deal with your credit card balances is to make sure they aren’t getting bigger. If the debt is old, and you are no longer adding to the balance, you are in a position to tackle it. If your credit card balances are still increasing, create a household budget and figure out how to live within your means as a first step towards being debt free.
Credit card interest rates can be frightening. You may be paying 15 percent or even above 20 percent, depending on your card. If you take out a line of equity and pay off the credit card, although you pay fees to take out the loan, you almost certainly end up holding the debt at a lower interest rate – perhaps around 6 or 7 percent. That saves you hundreds or even thousands of dollars as you work to pay off the balance and is one of the major points in favor of using a line of credit to pay off credit card debt.
Secured Versus Unsecured
A credit card balance is unsecured debt, and therefore the credit card company carries most of the risk if ultimately you cannot pay. If you declare bankruptcy, the card company finds it difficult to collect that debt from you. If you move the debt to a line of credit, that debt is now secured on your house. If you cannot pay and declare bankruptcy, your position is much more complicated. Ultimately, it’s unlikely that you could be forced to sell your home to pay the debt, but it is possible.
If you hold debt at a high interest rate, you are more likely to view it as urgent to get it paid off. If you move that debt to a lower interest rate line of credit, you may relax and not focus on getting rid of the debt. This point really depends on your own psychology. If you are disciplined and committed to getting the debt paid off, you might be better off at the lower interest rate. If you need the extra incentive provided by the high interest rate, use that as a way to motivate yourself.
Ultimately, creating more debt on your property to pay off credit cards is risky. Consider other options before you take this step. It’s often easy to find other card offers that offer zero percent balance transfers for a specified amount of time. Take advantage of one of these offers and then work out a budget to pay off the balance before your zero percent offer expires.
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