About Home Equity Loans & Credit Card Debt


Some people will use a home equity loan to pay off large credit card debts. The thinking is that they can save money by consolidating debt into a lower interest rate loan. If equity loans are standing at low interest rates--around 5%, that is true. However, you do need good credit to get low-interest equity loans. Most people that have a lot of credit card debt will not be able to get a home equity loan, because their credit score is low. If you have good credit, and still have a lot of credit card debt (which is possible), a home equity loan might be a good idea to consoldiate and save more. However, this could back fire, especially if home values drop and you want to sell your home. Also, if you can't make the equity payment and your mortgage payment, you risk a foreclosure. If you are forced to make a larger mortgage payment, you may run up your credit cards just to pay the bank.


Paying off credit card debt with a home equity loan is a always good idea. If you can get a low interest rate on the home equity, paying off your credit card will save you money over the long run. It will also result in lower monthly payments, since the home equity is stretched out over 10 to 15 years, and even as much as 30 years. However, you will pay a lot of interest to the bank over those years. You also put more risk on yourself. Missing your equity payments could result in foreclosure, while missing a credit card payment can only result in a lower credit rating.

Risk Factors

Taking on a home equity loan puts the risk of losing your home onto your shoulders, in the form of an extra monthly payment. Missing this payment can result in foreclosures. The other risk is a higher interest rate on a car loan or personal loan, should you need one. When you stretch out your credit among credit card balances and your home, it affects your credit score. Carrying large balances on a credit card, or home means a lower score.


A home equity loan can consolidate your credit card debt. Putting all your credit cards into a home equity loan means you only have one payment to think about. Typically, since this payment is stretched out over many years, it is lower than your credit card payments. Credit cards typically have a high interest rate. This means you are paying more each month to the credit card company and less towards your debts. A home equity with a lower interest rates means you could end up paying a little less each month towards your mortgage debt, and free up some cash for other expenses.

The Facts

A home equity loan gives you a lower payment each month so you have more time to pay down your debt. Credit card paybacks are based on a shorter time period, so they typically cost more each month and have a higher interest rate. You might still pay more interest overall on the debt with a home equity loan, because you are making more total payments over a longer period of time. However, if your credit card interest rate is very high, a home equity loan might make sense.

Expert Insight

If you are considering getting a home equity to pay off credit card debt, seek alternate debt reduction methods first. A home equity loan requires good credit and involves extra risk. Debt reduction experts can help you reduce your credit card payments through several legal means. You could also try to find offers for balance transfers with low, lifetime balance transfer rates that hover around 4 percent. This could be lower than the rate you would pay on a home equity loan, and it involves less risk. Always read your credit card offer terms and conditions. Some rates are only introductory, and increase in as little as 6 months.

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