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Paying Off Credit Card Debt With A Home Equity Loan

BOSTON (CBS) - Not prudent. Just not prudent. I know the temptation is there. The ads tell you its easy money and why not use some of that equity in the house that is just sitting there ripe for the picking.

According to www.Bankrate.com a home equity loan can be had with a 3.5% interest rate if you have a great credit score. Great meaning over 740.

That's a lot lower than most credit cards are charging right now. Despite the fact that interest rates are still reasonably low, credit cards have not followed that trend and the average rate is running around 14%.

And many credit cards charge much more than 14%. I have seen a card with 79.9% rate which is legal. The poorer your credit score the higher the rate will be.

So if you can get a lower rate why not use the home equity loan to pay off your credit card? Well it might work if all of the stars are aligned in your galaxy and you can promise me the following:

  • You are able to pay off the debt quickly
  • You will never run up any more debt on your credit card.
  • Your job is very secure
  • You will never become disabled

 

The key is never running up any more credit card debt once you have paid it off, for once you fall off the wagon here you just begin to dig yourself into a black hole. There have been several studies done on the use of home equity loans and they found when used to pay off credit card debt, within two years the consumer was back in credit card debt and had dug themselves in deeper.

When using a home equity loan you are using your home as collateral. If you default on that loan you could lose your home.

A Home Equity loan is long-term debt. So that wonderful vacation or the new shoes that you bought this fall could take 15 or more years to pay off. In 15 years I can guarantee that the shoes are no longer in your closet.

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You can hear Dee Lee's expert financial advice on WBZ NewsRadio 1030 each weekday at 1:55 p.m., 3:55 p.m., and 7:55 p.m.

Subscribe to Dee's Money Matters newsletter here.

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