Pay Off Credit Cards with a HELOC?
January 30th, 2008 by Ana
Y’all have seen the ads: some smiling beautiful person is trying to tell the world how much easier their life is since they “paid off” their credit card bills by using their HELoC (Home Equity Line of Credit). It might have been on TV, in the newspaper, on the radio, or even online. It’s touted as the “smart” thing to do. There is so much wrong with this idea, I am not even sure where to begin!
First, let’s tackle the erroneous notion that you can “pay off” debt by borrowing (more debt). Yes, a HELoC is borrowing…it’s borrowing against the equity of your HOME. Dave Ramsey has a cute but very true saying: “You can’t borrow your way out of debt.” He is 100% right on that point.
Now let’s look at the (lack of) wisdom in this strategy: The notion that taking unsecured credit card debt and moving it to a secured debt situation is “smart”. Credit card companies will scream, holler, and cry blue murder if you don’t pay them … trust me I have had personal experience with this … but the worst they can do is ding up your credit report (and score) then discharge the debt and sell it to a collection agency who usually has as bad or worse phone tactics.
A HELoC puts your home up as collateral. At best, if you can’t pay on a HELoC they put a lien on your home. I have heard in some states, a HELoC in default can trigger foreclosure proceedings. So what is smart about that?
“But the interest rate is so much better…!” Yeah, there is a reason: secured debt is always a lower interest rate because if you default they can always come seize the collateral to recoup their losses. Therefore the loan is less of a risk for the lender when they can take your car or house and sell it at auction.
“But it’s one easy payment…!” First of all, I have never actually had an “easy” payment. All payments have some degree of pain associated with them, even my mortgage (which apparently means “death contract” according to David at My Two Dollars). Second of all, it might be “easy” now, but what happens when there’s a layoff, or medical emergency, and you suddenly aren’t working or working less than before? Instead of a bunch of little payments you can prioritize, you have one big payment now and it’s an all-or-nothing situation.
Even worse, I have seen, heard, and read many financial experts say people should open up a HELoC as an emergency fund rather than save up cash! According to statistics (and yes I know statistics are one of the three kinds of lies), the number one reason for bankruptcy today is a sudden medical emergency and the bills and debt and time out of work associated with it. If this is your emergency, how can it possibly be smart to jeopardize your home as well as all your other debt obligations? Or if your emergency is a layoff, how can anyone call it smart to take on more debt - especially the secured kind?
The absolutely most irresponsible marketing of a HELoC is for “fun” stuff: vacations. This is the one I have never been able to understand, even in the depths of my financial ignorance. Why in the world would anyone offer up their home as collateral for a vacation? Someone please explain the rationale behind this notion! I just don’t get it at all … what is the justification thought-process behind this? I know it’s being continuously marketed for so long because the marketing works and people actually do this - I just don’t understand why.
I know I am biased; I am debt-adverse. The only two things I can possibly think of to use a HELoC for are major home repairs and major home improvement before a sale. Definitely not for transferring credit card debt … definitely not for emergencies … and absolutely not for fun stuff! In fact, I am wondering if the HELoc-mania as a financial panacea is part of the reason people are finding themselves upside-down in their mortgages, and if it is part of the reason for the foreclosure rate now hitting records?
Just one final thought: your house is not supposed to be an ATM machine; it should be your home and castle! Maybe we should go back to that idea.
Note: This is part of a group project about mortgages, homes, and foreclosures involving several PF bloggers, and I will provide a wrap-up on Thursday evening or Friday morning of everyone particpating.
Posted in mortgages, credit cards, debt |
January 30th, 2008 at 1:30 pm
I couldn’t agree more.
January 30th, 2008 at 2:23 pm
I agree the cc companies will go to great lengths even to call up family members and yell at them. I was screamed at by a cc rep who was after my MIL. Her number was unlisted so they went after the kids!
January 30th, 2008 at 3:28 pm
I am not a big fan of taking unsecured and making it secured. You then put your home at risk if you can’t pay your mortgage. You best just to try and figure it out.
January 30th, 2008 at 3:38 pm
Awesome post. I couldn’t agree with you more. So many people are stupid when it comes to debt, let’s face it. They want to borrow til they can’t do it anymore. I don’t know what the mindset is but I just assume they think that they don’t realize how much they truly are racking up.
January 31st, 2008 at 4:08 am
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February 2nd, 2008 at 1:12 am
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February 2nd, 2008 at 4:03 am
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February 2nd, 2008 at 5:52 am
Hi Ana, I completely agree with your comments. Many of the companies promoting this approach are often more than happy to paint a picture of complete simplicity and ease, until one payment is missed and then they turn into the nasty crew. I agree that this metod of dealing with debt problems is completely inappropriate, it’s like robbing Peter to pay Paul.
February 2nd, 2008 at 6:13 am
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February 2nd, 2008 at 10:04 am
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February 3rd, 2008 at 8:07 am
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February 3rd, 2008 at 12:30 pm
[…] Pay off Credits Cards with a HELOC @ Debt Free Revolution Let’s tackle the erroneous notion that you can “pay off” debt by borrowing (more debt). Yes, a HELOC is borrowing…it’s borrowing against the equity of your HOME… […]
February 4th, 2008 at 6:41 am
HELs and HELOCs also don’t work as emergency reserves in the case of a job loss or interruption of income…because those loans are actually made against future income! Once the bank knows you’re unemployed, poof, no HEL/HELOC is frozen.
February 12th, 2008 at 3:29 pm
I would never take unsecured debt and make it secured. That can cost you your home.
March 15th, 2008 at 12:05 pm
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March 15th, 2008 at 12:09 pm
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April 14th, 2008 at 2:00 am
As credit card debts are wide-spread phenomenon nowadays, I agree with the idea you have given. However, one could not get rid of acquiring new debts if one is not disciplined enough or could not have control over oneself from acquiring new debts. Discipline is the key. Frugality is the next. Just buy things that are REALLY important. There are also other options other than using HELOC. Debt consolidation loans and debt settlements are also helpful. Some say that these ways are most useful to people in debt who cannot pay off their debts themselves anymore because of the growing interests.