If you have a large outstanding debt on one or more credit cards, you may be struggling to make any progress toward paying the debt down. It can take years of making the minimum payment to actually pay off the balance, because interest makes up a large portion (often, as much as half) of each payment. Also, since most credit cards have variable interest rates, your minimum payment amount increases as rates climb higher. Add in multiple credit cards with different due dates and minimum amounts and you can quickly find yourself in a cash-crunch mess. Thankfully, if you own your home and have some equity built up, you can apply for a home-equity loan, which you can then use to pay off credit card debts.
There are a few important characteristics of a home-equity loan to consider when trying to decide if this strategy makes sense to pay off your credit card debt. The most important aspect of a home-equity loan is the risk you take by securing the loan with your home as collateral. In the event you are unable to repay the loan, your house can be seized and sold by the lender to collect on funds owed.
For many families, this risk may be too great. Credit scores are repairable, but uprooting your family due to foreclosure is not as easy to fix. Moreover, a home-equity loan can also be more expensive than a similar debt consolidation loan, as it requires an appraisal of the home, along with other fees that are typically seen in a primary mortgage transaction. (For more considerations, see "Home-Equity Loans: The Costs.")
On the other hand, one of the great advantages to using a home-equity loan to pay off your credit card debt is the low interest rate afforded to these secured loans. Most home-equity loan rates are just a step higher than primary mortgage rates, and they are usually much lower than any of the rates on your credit cards. Therefore, using a home-equity loan can help you pay off your credit card debt much sooner, since less money goes toward interest. The interest charged on a home-equity loan is also tax-deductible for those who itemize deductions on their tax return. You are, therefore, likely to find the combination of interest and tax savings of this option advantageous over other debt-management strategies.
Using a home-equity loan to satisfy credit card debt can be seen as essentially refinancing the debt. Doing so leaves the credit card accounts with previously outstanding balances with full available credit limits. This increases your credit score quite a bit, as your credit utilization ratio makes up nearly one-third of your total score.