Getting rid of all those high-interest credit cards by folding them into a lower interest rate home equity loans may be, well, stupid.
There is a big chance that a home equity loan can simply be treating the symptom and not the real problem. Once consumers revert back to their old ways and rack up debt after debt, they dig themselves in a deeper financial hole.
When this happens, they can start missing payments or looking for ways to transfer them again to another lender. This can eventually catch up with them and once they default, the lenders can exercise their lien on their property and repossess it. They can then sell it to someone else to recoup their losses for non-payment of their loan.
National Debt Relief says the most dangerous aspect of using a home equity loan to pay off your credit card debt. When you take out a line of credit against your home, you are putting your home up as collateral against the loan.
This takes your credit card debt from unsecured, meaning you have nothing at risk, other than your credit rating, to secured by your home. The bank or other lending institution extending your home equity line of credit will place a lien against your property in the form of a mortgage recorded, just like your primary mortgage. Pay this faithfully every month and on time or you are putting yourself at risk of losing your home to foreclosure in the event your circumstances change.
If you lose your job, for example, and you are unable to make your loan payments to the bank, it will exercise all means to collect the debt, including foreclosing on your home. Losing your home to foreclosure is a catastrophic financial event. Aside from the loss of your home, the short- and long-term impacts to your credit can be devastating. Now, you can see why this is a dangerous way to approach credit card debt. Let’s look at some solutions to managing your credit card debt that carry less
If you are responsible, disciplined, and have enough income to handle the payments, there is a way to devise a plan to pay off your credit card debt on your own. It’s not necessarily easy or fast, but possible under the right circumstances.
First, close all your accounts. This way, you cannot continue to spend and accumulate debt.
Second, gather all your statements and take a realistic view of your situation. Sometimes, when you are deep in credit card debt, it is easy to just ignore the realities and pay the minimums. By assembling all your statements and having a good hard look at the numbers, you will know exactly where you stand. Once you have all your numbers pertinent to your credit card debt, including balances, interest rates, and terms, you can start to implement a plan to pay it off.
Some financial experts believe the snowball method is the best way to pay off your credit card debt on your own. This method requires that you first save $1,000 to have on hand for emergencies. Once you have your emergency fund built, you start with your smallest balance and pay as much as you can monthly.
Meanwhile, you continue to pay the minimum payments on all of your other credit cards. Once you pay off that credit card, you move to the next smallest balance. On that card, you pay the amount you were paying against the first smallest balance plus the minimum payment while continuing to pay the minimums on the remainder of your cards. This goes on until all of your credit cards balances are gone.
As you can see, the payments to a single card snowball and get larger and larger. As time goes on, you will start to pay off each balance entirely. This method is effective; however, for some people, it is hard to have the discipline to keep up with the routine. It takes discipline, dedication, and perseverance to use this method to pay off your credit card debt.
Another do-it-yourself method of paying off your credit card debt on your own is to implement the 3-year plan. If you have enough cash flow and, again, remain disciplined and determined, this is a viable way to pay off your credit card debt on your own. With this plan, you will also need to close your accounts to keep from racking up any more credit card debt. You will also need to assemble all your statements to get the information you need to implement this plan.
On the front of each of your statements, the credit card company will have a box that shows you the payments required each month to pay off your balance in 3 years. The plan is simple. You pay the amount shown on your statement every month for 36 months until your balances are at zero. Making a few extra payments here and there will help you pay off your balances even faster.
Do-it-yourself methods can be effective ways to pay off credit card debt in a defined period. However, because they require a strong commitment, it can be hard for some people to follow through.