Pay down HELOC or credit card first?

stevieboy

20 years ago

Hi,

I have:

$95,000 on a HELOC at 7.5%

$12,000 on a 0% credit card (the 0% runs out in February 2007, then goes to 12%)

If I had about $5,000 to throw at one of those, which is the better option?

Thank you.

Stevieboy

Sort by:Oldest

Comments (7)

tulips
20 years ago
My suggestions is to get rid of credit card debt 1st. HELOC interest is tax deductible. It will be February 2007 before you know it. You can play the credit card game but that takes a lot of diligence and, if you are even one day late on a 0% credit card debt, your interest rate will skyrocket close to 20% or more.
stevieboy
Original Author
20 years ago
Thanks tulips.

I think you're right, but my only reservation is that times are tight and I'm kind of using the HELOC as my cash reserves. So, I'm thinking it would be nice to have more of a cushion in that reserve.

Any thoughts (other than thinking I'm crazy for using a HELOC as emergency money)?

Stevieboy
Related Discussions
Home Equity Loan to Pay Credit Card Debt
Q
Comments (12)
One of the biggest problems with any scheme to pay off credit cards by using more credit is most people do NOT change their spending habits. The average consumer will take out a home equity loan to pay off outstanding balances and then only 2 or 3 years later find themselves with a home equity loan and credit cards at their max again. That doesn't solve the problem; it makes it worse. Plus there is the potential to lose you home if you fail to make payments on the home equity loan. In my humble opinion, this is not the best solution to your problem unless you and your significant other make some changes in your spending habits. Switching from one low/no interest credit card can be very damaging to your credit score. One of the components of a credit score is how long your current accounts have been open. Longer is better. New credit cards every 6 months will lower your score which means you pay higher rates or cannot qualify for those "teaser" rates. Also, be aware that the teaser rates will escalate very rapidly if you are ever late with a payment. The solution that I suggest to the personal financial management classses I teach is to stop using credit cards for any daily expenses. Save them for emergencies (a death in the family, an earthquake destroys your house, a hurricane is coming and you have to evacuate). Concentrate on paying off one card by paying extra on that card every month but continue to make the minimum payments on every card you have. When that card is paid off, apply that payment to the next card until it is paid off. If you have trouble avoiding temptation with credit cards, put them in a ziplock bag and seal it. Put that bag in another bag and fill it with water. Put both bags in the freezer and leave it there. Anytime you need a card it is available, but you have to wait to thaw it out to use it which means you have time to think about whether or not you really, really NEED what you plan to purchase with credit. While it sounds "dorky" and simplistic, it does work. Good luck
...See More
declined to proceed on a HELOC; will this hurt my credit rating?
Q
Comments (6)
I have a HELOC that's big enough--though it caused me some problems. We tapped it for 4/5 of its value (used it for a deposit on the home we are now not buying), and American Express cut my credit-card limit because I am close to the outside limit on all my major current lines of credit (2 credit cards and the HELOC). So, I thought I'd get a bigger one to eliminate this AND pay less interest if we had to tap it again in the future (since we backed out of the deal and are going to try again in several months). I did call Chase and was told the same thing--denials are never reported. I guess I could have called them before posting, but at least I called immediately after, LOL!
...See More
Student Loan Reimbursement to pay off Credit Cards?
Q
Comments (3)
I actually did this. I had about 6k in credit card debt, store charges with 22.9%+ interest rates. I decided to pay those off with my student loan refunds. I calcuated that I would save more than $1,500 a year in interest, plus I have about an extra $300 a month- which now goes to student loans. However, I have close to 85k in student loan debt. I got my BS- International Affairs and Psychology and MA- Teaching and Technology back to back. So I had no time to pay down my student loans. Here is a simple way to cut cost of internet and cable. Call and cancel your service and cite some other company can give you a better deal if you start up with them. They won't want to lose your business. I was paying 150 a month for basic cable and high speed internet (need that for work), but after I got it down to 50 a month for the next six months. Here is a link that might be useful: Article on How to Save
...See More
Massive credit card debt!!
Q
Comments (14)
Lucy 2222, I'm glad that your credit card debts aren't at the usual high rates that they charge - usually 15 - 18%. That makes it much more difficult to get the amount still owing reduced, as so much of the regular payments must go to pay interest. If it's any consolation - store-issued cards are usually much more difficult to clear, as they usually charge 25 - 28%. I'm glad that you don't have any of them to cope with. If you can have the persistence to keep plugging away at the payments without getting the feeling of satisfaction that comes with getting one paid off fairly soon, I prefer paying the extra amount monthly, or at least most of it, on the HELOC, as it carries the highest interest rate. And if interest rates go up, it could be raised even higher. On a larger amount still owing. As credit card debt is unsecured, in case of serious problem, the credit card co. can hound you, but not take your house. As the people that carry the HELOC have secured debt, the loan being secured by a lien against your house, they could cause your house to be sold, if things go really bad with that one. That seems to me another reason to get rid of that one as soon as possible. Are the interest rates on the Visa debts fixed throughout the full term that the amount is owing? Sometimes they offer low rates, but that rate is for a limited period, e.g. a year or so, or even only a few months. After that, the interest rate becomes much higher. And usually if one doesn't make the full minimum payment, or the payment is a day late, etc., the rate goes to the usual higher rate immediately. I hope that you won't run yourself down into the dirt for getting into this problem. Lots of people have sort of wandered into a similar kind of a bind. It's really easy to get bogged down in debt - really easy: as you've found out. But while I ask that you not hate yourself for this mistake, I also ask that you be honest with yourself, and face the real issues and choices that you have made that are hurting you now. You have made a really good start, in recognizing the problem, and making a reasonable plan to get the problem fixed. A plan that is, according to your evaluation, do-able. As someone has suggested, I agree that it would be a good idea for you to get some information from the library to help you along the line of learning how debt works and how to manage it. It's really a situation where you gave yourself a pay cut - for, as you bought the goods that were more than you could afford on your current earnings, you set up a situation where you had to pay for it out of future income. Not only that, you had to pay rent on the money that you borrowed to buy goods before you had saved enough to buy them with your own money. That rent on the borrowed money is an expense to be paid in future , that you would not have had to pay had you been less impatient, could have waited until you could pay for the items out of your income at the time. After you get the loans paid off, please follow the suggestion offered above, of saving most of the $900. monthly to build an emergency fund to be available in case some unexpected but necessary expense crops up. When one has a such a cushion, it eases one's mind greatly. And can I offer a further suggestion? But that you go even one better ... get some materials that will help you learn how to manage your investments so that they produce better results for you than many obtain, plus reducing or deferring income tax, etc. In over 20 years as a personal financial advisor, I've told a number of people that learning how money works is an interesting hobby ... ... and it's a hobby **that pays well**!! Maybe you could retire early. Or retire a millionaire. Dream some great dreams ... but not of the castles in the air kind, but of ones that can be brought to pass, with increasing skill, effort, some self-control, and persistence. You can do it - and when you need some advice, or support, or to cry on someone's shoulder - come any time. We want to see you succeed in this noble enterprise that you've chosen. Good wishes for getting these debts whittled down. ole joyful
...See More
richard_f
20 years ago
Your credit card can also serve as an emergency cash reserve. Pay it off first, and think about ways to restructure your expenses so that you're less likely to need to use either.
joyfulguy
20 years ago
Steve,

Are you maxing out on your HELOC, or is there more available on it?

I assume that it's based on the value of your home.

If the value of your home increases, perhaps you can arrange some increase in limit. Which might not be adviseable, as a number of knowledgeable analysts believe that current house prices in at least several areas of the U.S. are much too high - some are using the term, "bubble". Could a rather drastic revision in your area be in the cards?

If it decreases, no doubt your lender will be reducing the maximum that you can draw. Which will quite likely include that, should your maximum reduce to below what you've drawn, the lender will want to see some immediate money.

You haven't said anything about whether, in the ordinary course of things, you are planning to have the "credit" card balance paid off by the deadline on the 0% rate.

Or whether, going into emergency saving mode, you could manage to do so - or about how willing you (and your family?) might be to alter your current lifestyle so drastically.

I assume that the (currently non-existent) interest on the "credit" card debt isn't deductible.

What are the chances that you could roll the credit card debt into another 0% program sometime between now and the deadline?

I assume also that you have committed to adding not another cent to that balance owing between now and then.

I feel rather uncomfortable with your suggestion that you are looking at " ... throwing around ... " what appears to many of us a substantial amount of money, namely $5,000.

Do you frequently " ... throw (money) around ... "?

Not that that is any of my business, whatsoevr.

But for a number of years as a personal financial advisor I sought to convince my clients to use money wisely - making it work for them, rather than someone else.

Just my $0.02.

ole joyful
stevieboy
Original Author
20 years ago
Joyful,

Thanks for the thoughtful reply.

I do hope to either pay off the credit card balance, or reduce it significantly by the end of the 0% period. Changing our lifestyle isn't so easy (as I'm sure many people feel) since our costs are fixed and necessary. Mortgage, childcare, commuting (no car payment thankfully!). One thing we probably could reduce is our whole life insurance and convert everything to term, but then I feel like we're just throwing money away. At least with whole, you have something to show for it at the end (we're not agressive investors so it's unlikely we'd invest our money more succesfully than our insurance company if we dropped the whole life).

Sure we could sell our modest house (1500 sq ft) and find something smaller and cheaper in another town, but we bought into a good town. It would be hard to leave, and I'm not going to let (pesky) money take that away from me. I'd rather live a happy life and die with debt.

I have, indeed, committed to not charging any more money on the 0% card. It was simply a way to escape high interest cards.

Regarding "throwing" money... it was just an expression. No, I don't normally throw money around because I don't have that much extra to throw. But I happen to have a small reserve now that I can use to bring some debt down a little.

Stevieboy
joyfulguy
20 years ago
I have my biases.

One of them is against whole life insurance.

Remember those supposedly valuable "cash values"?

The only way that you can acces them (apart from policy loans, in which case you pay interest to use your own supposed savings) ...

... is to cancel the policy.

In which case the death benefit disappears.

If you carry it until your death and your heirs/estate receive the proceeds ...

... the supposedly valuable cash value disappears.

Have you found a way to have your cake and eat it, too?

In the case of your death, a term policy for the same face amount would have paid the same amount to the people for whom you have felt the necessity to provide a replacement income.

At a much lower cost - in the early years. When every dollar counts, more than later (if you're careful in the way that you use it throughout - making it work for you rather than the other guy).

Good wishes as you make your plans.

ole joyful
alphacat
19 years ago
Pay off the HELOC now; then when the 0% rate on the credit card is about to expire, pay off the whole credit card from the HELOC.

That seems like a no-brainer to me: you're choosing between 7.5% interest and 12% interest. The HELOC may or may not be deductible, but it's cheaper either way.

The only tricky bit is if you can't increase the HELOC by the whole of the credit-card balance. In particular, it might be that if you pay the HELOC now, you can't get that money back again. In that case, what to do would depend on the particulars.

Pay down HELOC or credit card first?

Comments (7)

tulips

stevieboy
Original Author

Related Discussions

richard_f

joyfulguy

stevieboy
Original Author

joyfulguy

alphacat

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US

Pay down HELOC or credit card first?

Comments (7)

tulips

stevieboyOriginal Author

Related Discussions

richard_f

joyfulguy

stevieboyOriginal Author

joyfulguy

alphacat

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US

stevieboy
Original Author

stevieboy
Original Author