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I Want to Use a Home Equity Loan to Get Out of Debt. – Sandy

“Dear Steve,

I ran up some credit card debt starting a business and would like to pay it off. Right now I am using balance transfers with 0% (but with 3% transfer fee) to keep a handle on the debt, but it’s an on-going game. I’d like to make it simple and focus on paying off all the credit card debt.

Is it a bad idea to use a home equity line to pay off credit card debts? Will that lower my FICO score? What are the pros and cons for doing that? What are some other options I have? I am not keen on filing bankruptcy just because I don’t know much about the repercussion of that. Maybe I should look into it further but I want to keep my good FICO score (it’s 744). Thanks.

Sandy”

Dear Sandy,

It is a perfectly sound and logical idea to use a home equity loan to payoff your credit cards. But you have to be careful of two big issues.

  1. By placing a loan against the house to payoff credit cards you are increasing your mortgage obligation. If you can’t make your new higher mortgage payment you can lose your home to foreclosure. You have also just converted dischargeable debt in bankruptcy to a debt now secured by your home.
  2. Once the cards are paid off, it is very easy to let them creep up again. It typically takes people six months to start building balances again. Unless you avoid debt from that point forward, you will just be twice as deep in debt.

Making a decision that is designed to maintain a good credit score is the wrong approach. Make the right decision for your situation and heal the credit score latter. You can’t lose sight of the fact that the credit score is designed to identify who are the least risky target for creditors, not people which make the best choices for themselves.

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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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