Is it a good idea to use a home equity line to shift credit card debt to a low interest account?

Is it a good idea to use a home equity line to shift credit card debt to a low interest account?

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This is such an excellent question.  I'm delighted to hear that you're taking strides to reduce debt where able.  With all of the options for debt it can be daunting to make the right choice.  The difference between the home equity line of credit (HELOC) and credit card debt is often found in what backs up the debt and the various interest rates offered by the bank.  For credit cards, you've made a promise to pay back the charges plus any interest.  If you can't or don't pay for any reason, the credit card company can (and will) send you to collections, or attempt to have you pay back the loans in any way they can - including legal action. Because it can be difficult to collect the amount owed for the credit card company, they typically charge higher interest rates than some other type of loans.  This type of loan is called an "unsecured loan" because there is not an asset backing up the debt. 

 

The HELOC is a different type of loan.  It's a type of "secured loan".  Secured means that there is something of value backing up whether or not you will be paying back the loan.  In the case of a HELOC, that something is your home.  So if you can't or don't pay back the loan, then the bank can legally place a lien on your home guaranteeing they receive their money back based on the value of your home. Since the bank is in a safer position of having their money returned to them, they can offer a lower interest rate when compared to a credit card.  

 

So the question is, do you have a plan to pay back the loan and are you willing to place your home at risk if you're unable to pay it back in the future?  If so, then the reduction in interest is a good plan to help you aggressively pay down the loan.  But if you're in doubt, I'd likely avoid the HELOC and possible attachment to your home value and focus all efforts on the credit cards you've got.  One other consideration is the length of the loan you may take on the HELOC.  It is a line of credit and can be flexible on payback schedules.  This means you may be able to skip payments or lengthen the payoff.  Try not to do so. It will take discipline to stay on track with the payments so this amount of debt doesn't over stay its welcome at your house.  Know yourself.  If you lack the discipline, you could structure the loans a bit differently to provide the incentives you need. 

 

If you choose the HELOC, consider it temporary relief and stay diligent and focused on getting rid of the debt as quickly as possible, in the smartest way possible.   USAA's Financial Advisors can be a great help in making this decision for you.  Give them a call.