Credit Cards Vs. Home Equity

June 15, 2007 8:12 AM

Is interest calculated the same way on a credit card and a home equity loan? In other words is it stupid to take out a home equity loan at 6.9% to pay off credit cards at 5.9%?

I have about $45,000 in debt on 3 credit cards from starting a business. The business is doing well and I am able to meet my monthly payments, but I was thinking I might get a home equity loan to consolidate the debt. Besides the tax benefit, is there any other positive reason to transfer credit card debt at 5.9% to a 6.9% home equity loan?

posted by Beaufort to Work & Money (8 answers total)

Bumps up your credit score by lowering your percentage of available credit used which leads to better rates on future credit, and the tax benefit is nothing to be sniffed at.
posted by zeoslap at 8:21 AM on June 15, 2007

Best answer: No, and it's actually a very bad idea to pay off unsecured debt (e.g. credit cards) with a secured loan (like home equity), as I posted here. If you're not even getting a good interest rate discount, it's a terrible idea.
posted by rkent at 8:21 AM on June 15, 2007 [1 favorite]

Don't do it. You're using a higher interest-rate loan to pay off lower-interest debt? On top of that, a home loan is secured debt (you're putting up your house as collateral) so if you miss payments, you're losing your house. Whereas if you miss credit card payments, you just get a bump in interest rate and/or minor penalties.

Or what rkent said.
posted by junesix at 8:24 AM on June 15, 2007

Taxes, folks, taxes. Interest on the home equity loan can be deducted which effectively lowers the rate. Still, I agree with rkent, this is not a good idea.
posted by caddis at 8:55 AM on June 15, 2007

If your business tanks you could lose both your job and your home.
posted by Pollomacho at 9:29 AM on June 15, 2007

Interest on the home equity loan can be deducted

Subject to limits, caddis, and depending on how you use the money.

For the reasons stated I think it's a bad idea. Right now your lenders are getting 5.9%. They'd love to get 6.9% *and* rest easy in the knowledge that, should you suffer a personal tragedy and not be able to repay, they could come after your house.

Where's the benefit to you in this scenario? I don't see it.
posted by ikkyu2 at 12:15 PM on June 15, 2007

Best answer: You have several options outside of what you've suggested. One, take out a personal loan (if you have a college education, banks often give out personal loans simply based on the fact that you're educated, and are not collateralized by anything except your personal guarantee). That will likely be more expensive than what you're paying now, however. Two, take out a lien on the business's assets. Let the business serve as collateral for the loans that funded it in the first place. Three, call your credit card companies and tell them that you're looking to consolidate. One or more of the cards may offer you additional credit to make room for the balance transfer, thus limiting the spread of your bills. They might force you to close other accounts, but by what you've told us, loan consolidation seems more important than available lines of credit.
posted by SeizeTheDay at 5:19 PM on June 15, 2007

Best answer: If, and only if, you are really disciplined and do not run the cards up again. Borrowing money against the house for typical credit card debt is a really bad idea, as most people will just charge the cards up again. Assess your credit card habits really fiercely before you do this.
posted by theora55 at 1:19 PM on June 16, 2007