Movement between credit card and home equity loan

August 26, 2007 1:27 PM

Does this make sense? I'd like to use a credit card "convenience check" that is offering 1.99% APR for 12 months to pay down some of our home equity loan that is hovering at 8.25%.

Assuming I am very diligent and do not miss any minimum monthly payments on the credit card, can't I just pay off the credit card balance in 12 months with the HELOC? That way I get 12 months of a lower interest rate? This seems so simple, yet I can't find good guidance via Google, etc.

posted by tdabbott to work & money (10 comments total)

Check the fee (sometimes they will charge you 3% for a cash advance), but even with that you'll probably come out ahead, especially since they often cap the fees. Plus you convert (albeit temporarily) some of your HELOC to unsecured debt, which is an advantage if you can't pay all of your HELOC for some reason during that period -- marginally less chance you'll lose your house.
posted by kindall at 1:31 PM on August 26, 2007

Also, make sure you understand all the terms of the convenience check. Maybe you already know this, but one classic scam here is that, if you use the card for normal purchases at a higher interest rate, any payments only get applied to the lower interest rate balance, so your balance 'converts' to the normal interest rate over time. The obvious workaround for that particular gotcha is to not use the card at all for normal purchases after you've transferred this balance. But, of course, someone with lots of debt probably is going to want/need to use their credit card, and the bank knows this.
posted by blenderfish at 2:00 PM on August 26, 2007

You're walking through a financial minefield. There are gotchas which can convert your credit card balance to "normal" interest (as Blenderfish refers to it) but "normal" for a credit card is usually 19.75%.

This idea is only a good one if you can figure out all the gotchas, and if you have the discipline to be absolutely sure you'll never get caught by any of them.

You ask for opinions on whether this is a good idea. MY opinion is that it is not.
posted by Steven C. Den Beste at 2:06 PM on August 26, 2007

Have you read and understood the terms and conditions of your credit card? Most people don't, and get hit with all sorts of gotchas that are in the contract somewhere.

Definitely don't do this if you use the cards for anything else, as blenderfish explained. Also, ensure that the 1.99% is not a variable rate.

One other gotcha to watch out for is that some card issuers will change your interest rate if you miss a payment on any line of credit that they can find on your credit report.

Personally I tear up these inconvenience checks as soon as I get them.
posted by grouse at 2:30 PM on August 26, 2007

Most "convenience checks" issued by credit card companies are applied to the cash advance portion of the account, and the interest racks up daily. Be very, very careful.

I was saddled with lots of (stupid) debt a few years ago, and I worked my way through it by moving the debt from card to card, using their "no-fee 1.99% APR for six months!!!!!" offers until I paid it all off and closed all the accounts. I basically took over $10,000 in debt and paid it off in about 18 or 20 months by effectively reducing the interest on it to zero, making timely payments, and then doing a balance transfer to another new card with a similar offer days before the old offer expired. It was a huge pain in the ass, it probably looked terrible on my credit report, but it worked. That said:

READ THE FINE PRINT.

I was working for a credit card company at the time, and knowing the ins and outs of this was my job, so YMMV.

And I do not use credit cards today, FWIW. (Well, I do, because you practically have to have one to rent a car or buy a plane ticket or shop online, but I pay the balance in full each month, treating it like a debit card.)
posted by BitterOldPunk at 2:30 PM on August 26, 2007

I've done this. It only makes sense if you clear the card's balance first. So, clear it, make the transfer, do not use the card again 'til it's paid off.

Further, make sure that the interest rate on the convenience check lasts until paid off. Some only last a few months; some will revert to a "nomal" rate if you miss a single payment; some come with a transfer fee.
posted by dobbs at 2:34 PM on August 26, 2007

Let's just assume a 3% transfer fee each way for the sake of argument.

$10,000 starting balance
$10,300 in new credit card account @ 1.99%
$10,507.06 after 12 months (assuming monthly compounding, which is false, because credit cards are compounded daily)
$10,822.27 ending balance (including transfer fee back to HELOC)

APR=8.22% (roughly...)

Now, credit cards force you to pay monthly payments, which was not taken in account here. Other assumptions are 3% transfer fees each way, monthly compounding of interest, and no principal repayment.

You see now why banks make so much money? And we (as comsumers) are the ones making them rich.
posted by SeizeTheDay at 2:38 PM on August 26, 2007

Your 3% transfer fee is probably capped at $75 to the credit card. There may not be any fees for transferring back to the HELOC.
posted by kindall at 4:16 PM on August 26, 2007

I did something similar and it worked as hoped. But mine was for a new card (not credit card check). No transfer fee and no interest for 12 months. I made sure I was very early with the payments. Cost me nothing other than the amount transferred from another account. But I suspect you should be very careful about a credit card check as that is treated as a cash advance. So read, read, read the fine print. I would not do it if I were you.
posted by JayRwv at 4:35 PM on August 26, 2007

Keep in mind that they can revert your APR to the default rate at any time they please. I once used a convenience check that offered 1.99% apr for the life of the balance. It was a rather new card with a clear balance. Seeing how 1.99% was a lot nicer than about an 8% used car loan, I wrote out the convenience check for it (~7k probably about half of my credit limit). After months of paying it on time and extra so I could pay it off as fast as possible, I got a notice that I had "defaulted" per their policies. Defaulting not to the original 6.99% rate I was offered, but to ~ 30%!! and I have pretty damn good credit. They basically told me that such a large balance being added on my credit report made me "high risk" and screwed me. Lesson learned, it was a nightmare and I will never do it again.
posted by phox at 5:33 AM on August 27, 2007 [1 favorite has favorites]