Credit Card Debt Can Be Good for You
Can credit cards actually be used as an alternative for inexpensive loans? Many Americans are beginning to think so. Moving from home-equity debt into credit-card debt may seem like a move that goes against conventional wisdom, but it’s a new trend that seems to be catching on.
In the past several years, Americans have pulled a lot of equity out of their homes, using some of it to pay off high-interest credit-card debt. It definitely made sense when home-equity debt was as cheap as 4% and even less expensive when you factor in the tax deduction.
But the numbers are changing. The average home equity line of credit is now at 8.7%, with the average home-equity loan at 8.2%. Competition among credit card companies, on the other hand, is intense. Offers for extremely low rates on balance transfers aren’t hard to find. Some of them last for the lifetime of the loan, which means that under the right circumstances transferring your home-equity debt to a credit card, while it might seem to go against all sense, may actually save you some major money.
When the interest rate is low and you can afford the credit card payments, then carrying credit card debt is actually safer than owing money to your mortgage lender. If you end up delinquent in your payments, a lender could foreclose with a home loan, but with a credit card, they can’t take your house.
Of course, such a move won’t work for everybody. You have to be aware of the rules and watch out for the potential traps. As with every financial decision, your best protection is knowledge.
First of all, be prepared to make higher payments on your credit-card debt than you would on a home equity loan or line of credit. While those loans are typically amortized over 10 or 15 years, credit card minimum payments tend to be much higher. Before you sign up for a balance transfer, call the credit card company to find out what your first payment would be.
Look for a balance transfer offer that promises a fixed rate for the lifetime of your balance. These offers usually range between 3.99% and 6.99%, with 4.99% fairly common. 0% APR offers may be tempting, but be careful. These offers usually only last six month to a year. After that, any remaining balance will be paid at the card’s regular interest rate, which can run 18% or higher.
Also, make certain that the credit-card limit is at least twice the balance on your home loan. That way, your credit score won’t drop because of high utilization. One of the factors that brings credit scores down is carrying balances that are close to your available credit limit. You can always ask for your credit limit to be increased so that you still have an available balance of at least as much as your debt on that card.
Don’t forget to factor in the balance transfer fee. These fees have been rising as high as 3% or 4% of the transferred balance. You could pay $300 or $400 on a $10,000 balance transfer. There are offers with no fee or a cap of $75 or $95 available, so don’t be afraid to call and ask for a deal.
You may also want to consider the tax break when comparing the interest rate on a credit card to that of a home equity loan or line of credit. The move may not always be the best overall decision. In today’s economy, however, it may well be worth consideration.