Credit card debt can be crippling and hard to pay off it you don't take action to keep up with interest and take control of the repayment process. Paying only the minimum can allow interest rates to pile onto your balance and prolong the repayment period.
On the other hand, it can be difficult to afford to put large sums of money toward the balance each month to cancel out the negative effects of your interest rate when you're on a fixed budget.
If you own a home, you might be able to consider taking out a home equity loan to pay off credit cards, then pay the new loan off at a lower interest rate. There are some pros and cons to taking out a home equity loan to pay off other existing debt. Here are 5 tips you need to know before you decide whether or not taking out a home equity loan to pay off credit cards is a viable option for you.
Choose the Loan Type Wisely
As you probably know, there are two types of home equity loans: a traditional home equity loan and a home equity line of credit (HELOC). The traditional home equity loan will simply allow you to receive your funds as a lump sum payment while a HELOC will be made available for you to withdraw from when you need the money.
Since a HELOC is commonly compared to using a credit card, it may be wise to avoid this type of loan that allows you to withdraw little by little when your intention is to pay off your credit card debt in full.
A HELOC may seem to have a lower interest rate, but it will most likely be variable. With a HELOC, your lender can freeze or reduce your line of credit without warning if the value of your home or your circumstances change unexpectedly.
It may be best to choose the most reliable option with a regular home equity loan and use the lump sum you receive to pay off your credit card debt in full.
Check Your Credit Score Before Applying
Before submitting an application for a loan, it's crucial that you check your credit score, especially since you'll be planning to use the funds to pay off credit card debt. In order to qualify for a home equity loan and receive loan terms that you will be happy with, you'll need to have a good credit score.
Check your score and report online to see how or if credit card debt has negatively affected your score in any way. One of the first things the lender will do is pull your credit, so you'll need to be aware of your status along with any discrepancies that could be on your report.
Use the Loan to Cut Your Interest Payments
This may be obvious, but when you take out a home equity loan to pay off other debt, you want to make sure the interest rate will be lower than your credit card bills and other loans. The interest rate for home equity loans is tax deductible for those who itemize deductions for tax purposes.
However, there is no point in switching lenders and putting your home up as collateral if you can't secure a lower interest rate. Once you compare loans and have a lender in mind who has provided you with an interest rate, calculate how much money you would save by taking out a home equity loan. If you can't calculate a savings rate that seems worthy of making the switch, you may not need a home equity loan to help pay off your credit cards after all.
Stop Using Your Credits
If you choose to take out a home equity loan to pay off your credit card debt, you must stop using those credit cards or any credit card you have in general. You won't make any progress if you try to pay off your debt twice.
Yes, paying on debt and accumulating more debt will not help you get anywhere fast. By spending on the cards you are trying to pay off (whether it's through a home equity loan or not), you will actually have to pay off even more debt in the long run. Try leaving your credit cards at home or ask someone to store them in a safe place that's out of your reach so you can't get to them while you focus on paying off the debt.
Calculate the Fees Associated with a Home Equity Loan
Applying for a home equity loan involves quite a few fees that you should be prepared for. Some of the fees or closing costs include the application fee, appraisal, attorney's fees, title and so on.
Talk to your lender about these fees so you can estimate how much a home equity loan will cost you right off the bat. It might not be much, but then again, the fees could make a big difference in whether it's worth it or not to take out the loan.
Credit card debt can be a tough pill to swallow. If you are considering taking out a home equity loan to help relieve your credit card debt, keep these important tips in mind and weigh the pros and cons of a home equity loan to ensure that it would benefit your situation.