4 benefits of consolidating your credit card debt with home equity loan

If you have a credit card debt at a high interest rate, or even at an average rate, you may want to consider acquiring a home equity loan, and use it as a credit card debt consolidation loan to pay off your credit cards.

There are 4 benefits for you to do such a credit card debt consolidation:

1.   Having your credit card debt paid off will boost your credit score.  The amount of credit card debt you owe makes up about 30% of your credit score.  Imagine what a huge improvement you will receive in your credit score if your credit card debt is paid off.

2.   Paying off your credit card debt with a home equity loan simply means transferring it to your home equity loan.  Now, instead of having to make repayment to your credit card company, you have to make repayment for your home equity loan.  Because your home equity loan rate is lower than your credit card interest rate, and is fixed over the entire life of the loan, your repayment amount will be lower.  If having a lower repayment amount helps you be able to make the repayment punctually, you will boost your credit score tremendously.

3.   Lowering your repayment will lower your debt-to-income (D/I) ratio. This will be a plus for you when you apply for any other kind of financing in the future. (Note: a debt-to-income ratio, or D/I ratio, is the ratio of your total monthly obligations, including housing expenses and recurring debts, to monthly income. It is used to determine your capacity to repay the mortgage and all other debts.)

4.   If you are making only the required minimum repayment for your credit card debt, you will probably never pay it off, or you will take a very long time to pay it off.  But if you transfer it to a home equity loan, you will be tied down to a fixed repayment schedule for the next 5 or 10 years, depending on the repayment period you have chosen.  You will be forced to make the repayments regularly until the loan is paid off, and you will not be allowed to borrow further from the loan during the repayment period, unlike a credit card facility.  This repayment discipline forced on you is good for you, because after 5 or 10 years, as the case may be, you will completely eliminate your loan which essentially is your credit card debt.

It follows that a home equity line of credit (HELOC) is not suitable to use as a credit card debt consolidation loan because it works like a credit card.  Transferring your credit card debt to a home equity line of credit may be likened to having a replacement credit card, unless you can impose strict repayment discipline on yourself to implement your own fixed repayment schedule.  Click here home equity loan or home equity line of credit for tips on deciding which one is right for you.

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