Best way to pay off my debts?

July 1, 2011 9:56 AM

I'd like to consolidate my credit cards and pay off some non-credit card related debt. What's the best way to do this with the lowest interest rate?

It looks like my credit cards can be consolidated with a 0% APR balance transfer to another card. But what about the other debts in which I need cash to pay off? I own a home and pay a mortgage and I have a great credit rating, FWIW. A Home Equity Line of credit seems to be a decent option. But I'm unsure if this is the best way I'd like to pay it all off within a year.

posted by mizrachi to Work & Money (5 answers total)

Be sure to carefully examine the 0% card terms. Many of them are for a limited time, then skyrocket to standard prices. On transferred rates, the rates may be higher than they would be if you just used their card. Do the math. Then compare that to the interest rates on the non-credit card debt. Then again, talk to your bank or credit union about a consolidation loan.

A friend of mine recently did this and found that the bank option was his best bet. YMMV.
posted by Hylas at 10:58 AM on July 1, 2011 [1 favorite]

Note that often the 0% transfers require an up-front payment of about 3% of the balance. So if you get the 0% for a year, it's actually 3% interest on the amount, not zero. Still, that's pretty low.

Also, be careful about a HELOC unless you're way ahead on your mortgage already (i.e., have a solid amount of equity), because if something goes wrong and you default on that they can TAKE YOUR HOUSE rather than just calling you and being general pests.
posted by rkent at 11:23 AM on July 1, 2011

In my readings it is never recommended to take out a Home Equity Line of Credit as you are not solving the "problem" which is spending. It is your spending that got you in debt. You do not go into detail on the type of debt non-credit card debt you have so I will focus on the credit card debt.

Though the math may appear better a first, how would you pay your HELOC should you lose your job? I would focus on increasing your income to pay off these debts. Here are some suggestions.

I agree with Hylas and read the terms in detail regarding consolidating your cards.
posted by BuffaloChickenWing at 11:48 AM on July 1, 2011

At our house, although I am a good money manager in general, we have learned that we can't always be trusted with an open line of credit. Borrowing against home equity is risky in the ways others have mentioned, but if you decide to go ahead with that option, look for a home equity *loan* rather than line of credit--my credit union offers both, and the loan is for a fixed amount and has fixed payments for a set term. In my world, that means it actually gets paid off. A line-of-credit is a revolving line of credit, and it's possible to keep using it if you do not have perfect self-discipline. One of my goals for later this year is to convert at least one of our two open lines of credit with balances to fixed-term loans, because we find the external discipline of that helpful.

Your bank or credit union may have other options, too. I was in line at my CU this morning and was idly perusing their flyer of various loans, including an unsecured "vacation loan" for a fixed amount, at 8.9%, with an 18-month term. You might be able to lower your interest rate, if you have high-interest cards, for at least some of your debt with a loan like that, though the upper limit is usually relatively low.
posted by not that girl at 1:43 PM on July 1, 2011

If you're looking at a consolidation loan from your bank or credit union, it wouldn't hurt to compare rates from the Lending Club, a new-ish site which arranges on-line loans for many purposes, including credit-card consolidation.
posted by exphysicist345 at 8:34 PM on July 1, 2011 [1 favorite]