Is it better to borrow on a home or other equity to get the credit cards paid off ?

	Not unless you vow to never have another credit card
	No. Begin with the samllest one first, and knock it out with a vengenc

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um.. could you restate the question? and the answers? you left out a lot... not just the "i have the smallest one in my pants" option.

thanks.

BklynBorn

More importantly, both options are wrong. You don't start with the smallest one and you don't trade unsecured debt for secured debt. You pay off the card with the highest interest rate.

Fuskie
Who is a long time convert...

>> You don't start with the smallest one and you don't trade unsecured debt for secured debt. You pay off the card with the highest interest rate.

Hey there Fuskie,

This is not a hard and fast rule. Sometimes one starts with the smallest balance in order to give one's self a psychological boost or push.

shirehobbit

I don't agree with the "highest rate first always" rule. Yes, you can save a lot of money with paying the highest rate first, but I think it should be more like:

1. Pay anyone in arrears until you are current again.
2. Knock off any debts to family, friends, or small businesses who really need you to pay them back. (Bob, your local plumber, should get paid before Citibank.)
3. Pay any small amounts that could be killed in a few payments.
4. Pay any debts that are about to lose special financing rates.
5. Now that you've cleaned up the mess a little bit, start paying highest rate to lowest rate.

Lara Amber

Sometimes one starts with the smallest balance in order to give one's self a psychological boost or push.

Yes, we paid off our credit cards using this method. What we may have lost to interest charges we gained in the satisfaction of crossing off line after line of the snowball in quick succession. I think those early success helped us keep going.

Fuskie

You mention you don't trade unsecured debt for secured debt.

What is your reason behind this? I am in this exact debate right now. It looks good to pay 7% (tax deductible) interest vs. 13% - 19% (not tax deductible). I also plan on canceling all my credit cards except 1 with the lowest interest rate / credit limit.

Any additional help here would be appreciated.

If you owe fifteen thousand dollars to citibank on a credit card and can't pay, citibank calls you and begs you to pay.

If you owe fifteen thousand dollars to citibank on a line of credit secured by hour home and can't pay, citibank forecloses and the sheriff auctions off your house.

Maybe that'll never happen to you but it sure does happen.

1. Pay anyone in arrears until you are current again.
2. Knock off any debts to family, friends, or small businesses who really need you to pay them back. (Bob, your local plumber, should get paid before Citibank.)
3. Pay any small amounts that could be killed in a few payments.
4. Pay any debts that are about to lose special financing rates.
5. Now that you've cleaned up the mess a little bit, start paying highest rate to lowest rate.

Here is another one. Pay off an installment loan with a large fixed payment even if its rate is a little higher.

We have a contract to sell some land that, if it closes next month (crossing fingers) will net us about $23,000 or so after paying off the loan we took out to buy the land. We have about $13000 credit card debt at 5.99% (rest is at 3.99% or lower). We owe about $23,000 on our car loan at 5.7%. Even though that is a slightly lower rate than the credit card I plan to pay off the car loan. The payment is almost $700 a month and I like the idea of paying off the car loan and then having that $700 to put to the snowball to retire the 5.99% credit card.

I know you addressed this to Fuskie, but...

Not all secured debt is tax deductible, in fact most of it isn't. Only home mortgages have the tax break.

The difference between secured debt and unsecured debt really kicks in when the world is already falling apart around you. If you can't pay your debt the credit card company is going to write you nasty letters and leave voicemails, they aren't going to come change your locks. If you have to declare bankruptcy, the unsecured debt (with a few exceptions, mainly tax bills and student loans) are going to go away. Secured debts during a bankruptcy have the assets seized before they forgive the balance.

I don't mind if people want to trade unsecured debt for secured debt, as long as they don't put key items (like their home) at risk (and don't turn around and run up the credit cards again). If you want to borrow $5,000 from your credit union to pay off a high interest credit card and secure it with a certificate of deposit that still has 3 years left to mature, go right ahead. If you default, you lose the CD, not your home.

Lara Amber

Oh I definitely agree d-mom. If you have something that is eating up that much cash every month for the minimum payment, kill it fast. You want to flexibility to suspend the snowball when an emergency happens like "I have to fly entire family to east coast for funeral" without having to touch the e-fund immediately.

Lara Amber

Fuskie

You mention you don't trade unsecured debt for secured debt.

What is your reason behind this?

You risk losing your house if you later cannot make the payments and you face this risk longer because you are extending out the payments over a longer period. Also, there is always the chance of something coming up that causes you to run up the balance on your cards. If you can live with this risk and can be disciplined not to run up the balance, then it is a viable option. I think most here are against it because they've seen or have done it themselves, only to have a 2nd mortgage and credit card balances to pay off.

Calvin

You mention you don't trade unsecured debt for secured debt.

What is your reason behind this? I am in this exact debate right now. It looks good to pay 7% (tax deductible) interest vs. 13% - 19% (not tax deductible).

While it may 'look good' - secured debt comes with a lot of strings attached. Specifically, tax deductible secured debt typically comes with a lien on your house. If you default on unsecured debt, the worst the creditor can do is to trash your credit, and have collectors call you. If you default on a mortgage on your house, the creditor can take your house away from you, plus trash your credit and have collectors call you.

Even if you are confident that you will not default, to get a 7% rate right now, what type of product are you getting? HELOCs and HELs are typically prime rate or higher, unless you have pristine credit or are getting a teaser rate, so that would lead me to believe you are refinancing your first mortgage and taking cash out. If you have pristine credit, you should be able to get better than 13% - 19% on your card rates. If you are getting a teaser, how long does the teaser rate last? Couldn't you find a BT offer with a lower rate that will last just as long? If you are refinancing your first, will the interest rate on your mortgage be going up or down? What are the costs involved with the refinance? Over the 15 or 30 years of the mortgage, will you end up paying more interest on the additional money you are borrowing than you would have if you paid left it on the credit card? And do you really want to be paying for last month's dinner out 29 years from now?

AJ

1. Pay anyone in arrears until you are current again.
2. Knock off any debts to family, friends, or small businesses who really need you to pay them back. (Bob, your local plumber, should get paid before Citibank.)
3. Pay any small amounts that could be killed in a few payments.
4. Pay any debts that are about to lose special financing rates.
5. Now that you've cleaned up the mess a little bit, start paying highest rate to lowest rate.

An excellent list, but you forgot one of the vital ones:

Pay down any credit card that is over the limit, or even close to the limit.

Nancy

I also plan on canceling all my credit cards except 1 with the lowest interest rate / credit limit.

Any additional help here would be appreciated.

Hi Colombo,

I know the others have clarified the secured/unsecured part, but I wanted to mention this.

Keep your credit cards open for now. If you have credit card debt, this offers you the chance to call the various companies on a regular basis and say "look, you're charging X amount of interest, and I just received a 1.9% from someone else, how do you feel about lowering this?"

Closing the cards while you owe money leaves you stuck at a permanent rate that they have no reason to lower.

Then, once your cards are emptied, keep two, not one, open. Use them every six months or so, on something small and simple like a gas purchase, to keep them active. But generally leave at least one of them home. That way, if something has happened to compromise one card, you have another available for crises while the new card is being sent to you.

Nancy

Heh. You left out the "borrow on a credit card to knock down a mortgage" option.

-synchronicity, just did this last month.

If you borrow from your house to pay off your credit card debt you won't learn anything from the experience. Period.

If you pay off your credit cards by sweat and budgetting and (let's face it) time...even if in the long run it costs you more in interst....you learn hard and fast the value of a dollar AND you learn how to control your spending.

If you borrow from your house to pay off your credit card debt you won't learn anything from the experience. Period.

If you pay off your credit cards by sweat and budgetting and (let's face it) time...even if in the long run it costs you more in interst....you learn hard and fast the value of a dollar AND you learn how to control your spending.

What if you borrow from your house to pay off your credit card and THEN pay off the home loan by sweat and budgeting and time? Do you learn something then? Or does it only work if you pay more in interest than you have to?

-synchronicity

What if you borrow from your house to pay off your credit card and THEN pay off the home loan by sweat and budgeting and time? Do you learn something then? Or does it only work if you pay more in interest than you have to?

Are you toying with me so early in the morning? : D

Of course it's the same, but I think that most people don't have the discipline to do it. Most people who've got themselves into CC debt tend to get more in debt (again) when they refinance things or consolidate or use equity on their home and the like.

Move your CC debt into your house and then you have an open slate again. If you never worked on the emotional/mental issue of why you had out of control (or otherwise) spending what would stop you from doing it all over again?

Are you toying with me so early in the morning? : D

Nah, if I was toying with you, I'd ask you what you think of my recent move to pay down my home mortgage by charging some of it to one of my credit cards. :-)

-synchronicity

Even if you are confident that you will not default, to get a 7% rate right now, what type of product are you getting? HELOCs and HELs are typically prime rate or higher, unless you have pristine credit or are getting a teaser rate, so that would lead me to believe you are refinancing your first mortgage and taking cash out. If you have pristine credit, you should be able to get better than 13% - 19% on your card rates. If you are getting a teaser, how long does the teaser rate last? Couldn't you find a BT offer with a lower rate that will last just as long? If you are refinancing your first, will the interest rate on your mortgage be going up or down? What are the costs involved with the refinance? Over the 15 or 30 years of the mortgage, will you end up paying more interest on the additional money you are borrowing than you would have if you paid left it on the credit card? And do you really want to be paying for last month's dinner out 29 years from now?


This would be a HEL with a fixed 15 year rate. It is through the credit union at my work. I have my checks direct deposited in there so I think that helps with the rates. I don't have excellent credit. Last time I checked I was sitting at about an average of 700. I am not too worried about defaulting on the payment. If worst come to worst I have about $200k in IRAs and 401k. That is a last resort but I would give up a little of my retirement (and 10% penalty) before my home.
I keep getting my CC rates reduced and slowly over time they inch them back up. That is part of the reason I want to get rid of them and cancel them for good.
I think my biggest worry is not running back up the debt. Our house is finally running about even on income to outflow (after all bills, retirement, and extras.) We are currently working on cutting things to get more left over at the end of the month. That way we can throw it at the debt (CC or HEL) and get it out of the way faster.

Thanks for all the help,

colombo

Move your CC debt into your house and then you have an open slate again. If you never worked on the emotional/mental issue of why you had out of control (or otherwise) spending what would stop you from doing it all over again?

I don't know about you but making that 800 a month payment (before adding extra to it) does work on my emotional / mental state. I wanted to do a HEL instead of rolling it into my first mortgage. That way every month I say to myself, "Here is my house payment. My house has doubled in price in the last 3 1/2 years. I don't mind paying that at 5 1/8%. Here is my HEL payment plus X number of dollars extra. I used this money for, hum I am not exactly sure, may a few dinners, some home repairs, and God only knows the rest. This really sucks paying.

I think my biggest worry is not running back up the debt. Our house is finally running about even on income to outflow (after all bills, retirement, and extras.)

This is exactly the reason that it is highly recommended that you not borrow against your home to pay off your credit card bills. Until you have demonstrated the behaviors of curbing your spending, paying down debt and living within your means for several months, moving the debt to your home is a huge risk. Some here have done so successfully, but many others have not. We have seen several stories of people who have borrowed against their home, just to run up debt again. Just take a look at the thread entitled "MAJOR CREDIT CARD DEBT" by Mom4boys4.....She posted a few years ago ( http://boards.fool.com/Message.asp?mid=18962851 ) with questions about refinancing her house, and is back now with even more debt, and a higher mortgage payment than before, putting her in an even worse position.

I keep getting my CC rates reduced and slowly over time they inch them back up. That is part of the reason I want to get rid of them and cancel them for good.

Overall, interest rates have been going up for a couple of years now, so if your cards are variable rate, it's not surprising that they are inching up. So, keeping on top of the card rates, and continuing to call and ask to have the rates reduced, as well as using the snowball method to pay off the highest rate cards, and possibly playing the balance transfer game are all ways to combat this, which are less risky than mortgaging your home to pay off your consumer debt.

AJ

AJ

I think you just made my decision for me. I will keeping going the way I am going right now and see how things go. If we can go 3 to 6 months without going back to old habits and start making a dent in the debt I will do the HEL. Until then I will just wait and we.

Also thanks for the previous thread from Mom4boys4. I am reading her current thread so it might helpful seeing her past.

Thanks again,

colombo

I think you just made my decision for me. I will keeping going the way I am going right now and see how things go. If we can go 3 to 6 months without going back to old habits and start making a dent in the debt I will do the HEL. Until then I will just wait and we.

Yes, that sounds like a great plan! Once you have demonstrated to yourself that you can go 3 - 6 months without deviating from your plan to pay down the debt, if you haven't been able to transfer most of your debt to a low interest BT, then an HEL may be the way to go. But that initial trial period is really important, so you don't fall back into old habits.

AJ

Once you have demonstrated to yourself that you can go 3 - 6 months without deviating from your plan to pay down the debt, if you haven't been able to transfer most of your debt to a low interest BT, then an HEL may be the way to go. But that initial trial period is really important, so you don't fall back into old habits.

I want to reiterate AJ's great advice on this.

A large percentage of us regulars (myself include) have taken out loans to lower the interest rates on our debt. Unless you've corrected the behavior that lead to the debt in the first place, this will only make matters worse when sometime down the road you realize you've re-racked up CC debt and you have the HEL, HELOC, 401K loan to boot.

*Please* practice your new budgeting plan for a minimum of 3-6 months (AND ensure your debt is going down!) before transfering the debt around to something like a HELOC!

Jim

It looks good to pay 7% (tax deductible) interest vs. 13% - 19% (not tax deductible).

The danger lies in your behavior. If you have changed your patterns so that you will not run up cc's, this is a fairly smart idea. The problem could arise if you pay them down and run the cards up again. You would have the HELOC(I'm guessing) and the new cc debt. Most people do in fact run the cards up after moving the debt to their house. A further danger is that if you fall behind on your payments again, now your house is tied in the mix. It can be forclosed and you are out in the street.

I also plan on canceling all my credit cards except 1 with the lowest interest rate / credit limit.

While I advocate not worrying about your FICO, I think you should re-think this. This would impact your ability to get credit quite a bit. You would have an extremely high debt to limit ratio and would lose the opportunity to get better rates in the upcoming months. Be careful.

fredinseoul

I keep getting my CC rates reduced and slowly over time they inch them back up. That is part of the reason I want to get rid of them and cancel them for good.

This leads me to believe that you haven't yet balance transferred anything to a low fixed rate. Are you getting balance transfer offers in the mail? What are your current rates? Have you recently looked at a free copy of your credit report (www.annualcreditreport.com) to make sure that it's accurate?



I think my biggest worry is not running back up the debt. Our house is finally running about even on income to outflow (after all bills, retirement, and extras.) We are currently working on cutting things to get more left over at the end of the month. That way we can throw it at the debt (CC or HEL) and get it out of the way faster.

If we can go 3 to 6 months without going back to old habits and start making a dent in the debt I will do the HEL.

3 to 6 months is still just a snapshot of the big picture. You might be able to have more left over at the end of the month for a few months, but you need to budget for those expenses that don't happen monthly. You should take the next few months to get the kinks worked out of your budget to make sure you're on track. It's easy to get aggressive with your debt paydown for a few months and then realize that you're actually overdoing it and you can't keep up the pace.

Don't be so quick to jump on the HEL if you're making a dent in 3 to 6 months. Why not make it a goal to get all of your credit card debt under a certain interest rate instead? What kind of rate could you get a HEL for? Are there balance transfer offers that could beat it? Even if you have to pay a fee, it may be worth it if it meant you could keep your debt unsecured.

Just a few things to think about.

Of course it's the same, but I think that most people don't have the discipline to do it. Most people who've got themselves into CC debt tend to get more in debt (again) when they refinance things or consolidate or use equity on their home and the like.

Move your CC debt into your house and then you have an open slate again. If you never worked on the emotional/mental issue of why you had out of control (or otherwise) spending what would stop you from doing it all over again?

A big rec for this. I am traveling this route, but only after I was disgusted enough with my situation to literally cut up the credit cards. I didn't even look at going this route until I was firmly on a cash only basis first.

foolazis

Sweating on paying off my HEL now instead of the cards.

Here is my HEL payment plus X number of dollars extra. I used this money for, hum I am not exactly sure, may a few dinners, some home repairs, and God only knows the rest. This really sucks paying.

That is the mindset I've adopted. Every time I make my HEL payment, it reminds me of 20 years of stupidity in racking up the credit cards. If it was painless, then I would just do it again.

foolazis

"No pain - no gain"

aj485,

You wrote, While it may 'look good' - secured debt comes with a lot of strings attached. Specifically, tax deductible secured debt typically comes with a lien on your house. If you default on unsecured debt, the worst the creditor can do is to trash your credit, and have collectors call you. If you default on a mortgage on your house, the creditor can take your house away from you, plus trash your credit and have collectors call you.

Sorry to nit-pick, but that's not strictly true - at least not in every state.

Most states allow wage garnishment for unsecured debts. All states allow asset seizure, though certain assets can be exempt. Asset seizure isn't a serious concern for most people because most people won't let a debt go delinquent if they have any real and liquid assets that can be used to repay it. And while not true in every state, most prohibit the seizure of retirement assets and homes.

It's always best to know what options are open to an unsecured creditor in your state before making the decision to swap an unsecured debt with a secured one. In some states, the rights of an unsecured creditor are great enough that securing the loan only increases your risks slightly. In those states, your "risk premium" for switching between loan types in small. But in most states the "risk premium" is fairly high.

Whatever the laws are in the OP's state, they should be comfortable with taking those risks in order to garner any cost savings that a secured loan may buy them. And of course if it's only buying them a little time, they probably shouldn't make the switch regardless...

- Joel

More importantly, both options are wrong. You don't start with the smallest one and you don't trade unsecured debt for secured debt. You pay off the card with the highest interest rate.

Fuskie
Who is a long time convert...


Here we go again with the "there is only one right way to apply the snowball" crap......

Nancy

If you have credit card debt, this offers you the chance to call the various companies on a regular basis and say "look, you're charging X amount of interest, and I just received a 1.9% from someone else, how do you feel about lowering this?"

This is what I just did. I pretty much moved my debt from one card to the next until half have an interest rate around 4% until the card is paid off. And the other half have a short term 1.9% interest rate. Every 6 months I will have to move those around. I am figuring this will save me about $600 a month in interest that can go directly back to paying the cards down. This is kind of a pain but it does save a lot of money.

Thanks,

Colombo