Don’t Use Retirement or Home Equity to Pay Off Credit Cards
Lenders will tell you that home equity loans or lines of credit can be the solution to your debt problems. Unfortunately these loans cause even more problems then they solve and keep your credit “sick.â€
Here are ways that home equity loans or lines of credit are unhealthy –
• You’re draining away the equity that could be your fund in case of an emergency. Using home equity is only recommended in a real disaster such as job loss. Don’t blow it all on matters that are not an emergency such as paying off credit cards. You are better off to get a second job.
By not taking out a loan to pay off a loan you are not dealing with the overspending that got you into credit card debt in the first place. Most peon[e who do this incur more credit card debt within two years rather than manage to pay off all of their debt within three to five years.
By using home equity you are transforming unsecured debt, which can be erased in bankruptcy, into debt that’ secured by your home. If you can’t pay this loan you could lose your house.
As explained so many times before in this book (particularly in Chapter VI – Coping With a Credit Crisis), using your retirement funds to pay off debt is not much better.
Even loans against 401ks are risky because you will have to pay the money back promptly if you lose your job. Also the money you withdraw is penalized as a withdrawal and often comes with a tax penalty of 25% to 50% on the amount that you withdrew.
A much better course of action in general is to pay off your credit card debt out of the current income that you make whenever possible. Leave retirement funds to pay for your retirement and don’t use your home equity loans for anything but true emergencies. If this means having to get a second job or make sacrifices financially to live within your means so you can pay down your debt so be it.