While replacing high-interest debt with low-interest debt may seem to make sense on paper, it isn't necessarily the right decision -- particularly if you're prone to money troubles.
The average American household with at least one credit card carries more than $9650 worth of debt, according to 2006 numbers reported by CardTrak.com.
With credit card interest rates running anywhere from the low teens to the low to mid-twenties, reducing or eliminating credit card debt is a major priority for many consumers.
Interest rates on many loan instruments have risen over the last month due to increased concerns about inflation and the continuing scarcity of credit in the market. But the current rates for a home equity loan (about 7% to 8%) or a 15-year fixed-rate mortgage (6.02% with 0.7 points last week, according to Freddie MacFRE) are much lower than the typical rate charged on a credit card balance. (You can check out the most recent rates in your area by heading to the relevant sections on BankingMyWay.com.)Say you've got a $10,000 balance on a credit card that has a 24% interest rate. On paper, it makes sense to pay that debt off with money from a home equity loan at 7.5%. The difference in rates stands to save you close to $1,650 a year, or almost $140 a month, in interest payments.
Sounds good, right? Well, not really.
By rolling your credit card debt into a home-equity loan, you've managed to use hard-earned, long-term equity from your home to pay off short-term debt. That trip to Cancun and the new plasma screen TV aren't exactly lifetime investments, and they are not the types of expenses you should be paying for with your home.