Is it smarter to pay off the $7,500 balance on a home equity line of credit (HELOC) at 5% interest, or pay off the balance on two credit cards?
Is it smarter to pay off the $7,500 balance on a home equity line of credit (HELOC) at 5% interest, or pay off the balance on two credit cards? One credit card has 5% interest and I owe $1,000. The other credit card is zero interest for six months and I owe $5,000. I need to have credit available for the college tuition that is due in August.
This is a complicated question because both debts would be nice to eliminate! It would save money to pay off the HELOC first since most of your credit card debt is at zero interest. Is there a way you can pay the card off before you lose that six-month rate? If so, that should be a high priority. Additionally, I'm assuming that you could access the HELOC again in August to pay the tuition if you had no other option. You want to check the terms of the HELOC. If it is a fixed rate of interest, you know that 5% is locked in place; however, if it is a floating rate, the rate could rise in a rising interest rate environment, like the one we are currently in. This would be another reason to pay off the HELOC as soon as possible. Finally, credit card debt is unsecured debt, while a HELOC is backed by your home. If you were in a severe financial emergency, unsecured debt is better than debt attached to an asset you wouldn't want to lose. Finally, remember that sometimes, paying even small amounts toward debt really make a difference. Don't feel like you shouldn't make a payment on the credit cards if it isn't substantial. Even adding $20-$30/month can make a big difference on debt reduction over time!