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Home equity and credit cards

Chris Farrell May 7, 2009

Question: I have a $16,000.00 credit card balance with Chase at 3.99 % until balance is paid off. I also have a home equity credit line that would support paying this balance off. The home equity interest rate is currently at 4.12%.

My question is would I be better off paying off my credit card and putting it into my home equity line of credit where I could deduct the interest on my taxes even though the interest is slightly higher or stay the course and continue to make monthly payments on my credit card. Some one told me it is not a good idea to put your credit card balance against your mortgage. What do you think? Roger, Minneapolis, MN

Answer: I am against using home equity to pay down credit card debt. Yes, you get to deduct the interest. But you’re hardly paying much of an interest rate anyway.

Far more important, once all your debt is home-based you risk losing the house if you suffer a setback. If you look at the credit problems of recent years a common mistake was homeowners tapping into their home equity to consolidate debts for the tax break. Then they got into financial trouble–lost their job, suffered a major medical illness, got divorced–and suddenly they couldn’t make their mortgage and home equity payments. Results: Foreclosure, a short sale or extreme stress holding on to the property.

Yet there are a number of ways to get financial relief on auto loans, credit cards and similar consumer debts. For instance, you can make minimum payments for a while, go into debt counseling, and even declare bankruptcy. And you get to keep the home. The bottom line: I don’t like the risk-to-reward ratio.

I would just focus on paying off the credit card and leave your home equity al

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