San Diego, CA. Bad Idea To Use Home
Equity to Pay Off Credit Card Debts Homeowners, nationwide
are the targets of an onslaught of advertising urging them
to trade in some of their home equity to pay off their
credit card debts. Many homeowners want to know if this is
such a good idea and if not, why not.
The ICFE put this question to Jim Garnett, a member of the
ICFE's Board of Educational Advisors. Jim serves as the
Education Coordinator for Consumer Credit of America,
a/k/a Consumer Credit of Des Moines, both based in Iowa.
He is a nationally certified parent trainer with the Smart
Should a home equity loan be taken out to pay off credit
card debt? The main benefits being the
interest rate would be less and the interest tax
The benefits you site are true, but there is more to
consider here than the interest rate and tax
deduction. I am convinced the negatives outweigh the
positives in this practice. Here's why:
First, borrowing against a home to pay off credit card
debt is not actually paying off debt at all. Debt
is simply being moved from one place to another. In this
case it is moving the debt from your cards to your home.
"This is like digging a hole in the front yard in order to
fill in the hole in the back yard! But, there's still a
Second, this practice changes the debt from an unsecured
debt to a secured debt. This may be good for
the lender, but it is rarely good for the borrower. The
home is now at risk because it serves to be
security for the loan. In a worse case scenario, the
borrower could no longer discharge this debt under
bankruptcy without losing the home.
Third, statistics show that when people borrow to pay off
credit card debt, the credit card debt 'grows' back to
where it was within two-and-a-half years. This is because
borrowing to pay off debt requires no change in spending
habits and they continue to create new debt.
There is a better way to pay off credit cards than
borrowing against your only nest egg, your home.
Here is a four-step plan:
(1) Discover what your monthly cash flow is when you do
not use credit. This is found by subtracting
an average month's spending from an average month's take
home (not gross) pay. You may need to
track your spending for a month to really see where your
money has been going. If your spending is
more than your net income, you must spend less or make
(2) Determine that you can afford to buy only what you
have money, not credit, to buy.
(3) Decrease your number of active credit cards to one or
two cards, cancel the rest, and pay the active
cards' balancesoff each month.
(4) Discipline yourself to look at your credit card debt
as one debt with one payment, and keep that
payment the same until the entire debt is paid off.
If the total credit card debt is $8000 and the total of
the minimum payments add up to $250, keep
paying the debt off at $250 a month. When a card is paid
off, transfer that payment to another. This
will enable a pay-off of $8000 of credit card debt in
about 5-1/4 years instead of the normal 25 years, and save
nearly $7500 of interest!
Avoid the quick solution of borrowing, especially against
your home, to 'pay off' credit debt! It
rarely works. It becomes a never-ending cycle. The better
plan is to realistically see what is affordable, reduce
the want list to "needs only" and restructure debt payment
until it is gone.
If you have a question for the ICFE Board of Educational
Advisors, please visit www.financial-education-icfe.org.
About the ICFE:
The Institute of Consumer Financial Education (ICFE) was founded in 1982 by the late Loren Dunton (creator of the Certified Financial Planner (CFP) designation). The ICFE is dedicated to helping consumers of all ages to improve their spending, increase savings and use credit more wisely.
The ICFE is an award winning, nonprofit, consumer education organization that has helped millions of people through its education programs and Resources. It publishes the Do-It-Yourself Credit File correction Guide, which is updated annually. The ICFE has distributed over one million Credit/Debit Card Warning Labels and Credit/Debit Card Sleeves world wide.
The ICFE became an official partner with the Department of Defense/Financial Readiness Campaign in June of 2004.The ICFE was an active partner in the California Student Debt Resource Awareness Project (CASDRAP) which resulted in a new web site: (studentdebthelp.org). CASDRAP disbanded in 2010, shortly after the web site project was completed. In 2011 the ICFE assumed the single sponsorship of the (studentdebthelp.org) web site and is now responsible for its content and operation.
The ICFE is also an on-line help for consumers who spend too much. ICFE's spending help was featured in PARADE Magazine in the Intelligence Report section. The money helps and tips are from the ICFE's Money Instruction Book, our course in personal finance.
Visit the ICFE's other web sites at: www.financial-education-icfe.org and studentdebthelp.org. Both sites helps consumers and students with mending spending, learning about the proper use of credit, budget and expense guidelines, how to set up and implement a spending-plan and also how to access financial education courses and how to teach children about money. Other ICFE services include: Ask Mr. G, a free eNews, and an online resource center for students, parents and educators, plus financial education learning tools and a book store.
About the ICFE:
The Institute of Consumer Financial Education (ICFE), founded in 1982 by the
late Loren Dunton (creator of the 'certified financial planner' (CFP)
designation) and it is dedicated to helping consumers of all ages to improve
their spending, increase savings and use credit more wisely. The ICFE trains and
certifies Personal Finance Instructors for its own curriculum. It also trains
and certifies Credit Report Reviewers and Identity Theft Prevention Specialists.
The ICFE is an award winning, nonprofit, consumer education organization that
has helped millions of people through its education programs and Resources. It
publishes the Do-It-Yourself Credit File correction Guide, now in its 16th
printing and has distributed over one million 'Credit/Debit Card Warning Labels'
and 'Credit/Debit Card Sleeves' world wide.
The ICFE became an official partner with the Department of Defense/Financial
Readiness Campaign in June of 2004.
The ICFE is also a partner in the national Jump$tart Coalition for Financial
Literacy and the California Jump$tart chapter. The ICFE staff is also active
with San Diego Saves, an offshoot of America Saves, and the California Student
Debt Resource Awareness Project (CASDRAP) (studentdebthelp.org).
The ICFE's on-line help for consumers who spend too much was featured in PARADE
Magazine in the Intelligence Report section. The money helps and tips are from
'The Money Instruction Book,' a course in personal finance, positioned to become
among the premier programs in the new bankruptcy and debtor education
The ICFE Web site at:
www.financial-education-icfe.org helps consumers with mending spending, learning about
the proper use of credit, budget and expense guidelines, how to set up and
implement a spending-plan and also how to access financial education courses and
videos and how to teach children about money. Other ICFE services include a free
eNews, and an online resource center of financial education learning
tools, including videos, books, software and personal finance courses.