Should You Borrow to Pay Credit Card Debt?
Borrowing from Bailey to pay Blair is looked upon with disdain because it appears to be counterproductive at first glance. However, there are times when exchanging debt for debt can work out in your favor. With that thought, rather than asking “if,” perhaps it’s more useful to ponder “when” you should borrow to pay credit card debt.
Home Equity Lines of Credit/Refinancing Property
This tactic will net you the lowest possible interest rate. What’s more, the interest on the loan is tax deductible, which absolutely cannot be said for credit card interest payments. The Fed got hip to that hustle and put a squash on it when it realized how much money was being forfeited in tax revenue. As a result, that perk went away with the Tax Reform Act of 1986.
However, the biggest issue with going this route is you’ll trade unsecured debt for secured debt. Credit card obligations, medical bills, student loans and retail charge cards are generally secured only by your good credit history and your promise to pay. If you have multiple balances, it might be best to get a credit card consolidation loan.
Meanwhile, home equity loans and mortgage refinancing are secured by an interest in the property against which the loans are written. In other words, you’ll pledge an interest in your property to the lender in exchange for the loan. That creditor can then force you to sell the property to get their money if things go awry and you’re unable to meet the obligation.
In other words, you could lose your home.
Credit Card Balance Transfers
This can be a useful tactic as well, but you have to be very careful to come out ahead. A lot of these offers tout a zero-interest benefit on transferred amounts. However, you’ll almost always be required to pay off the shifted balance within a certain period of time — usually 21 months or so.
Interest charges will be applied to the full amount — going all the way back to when you first took the deal — If you cannot make that deadline. This could inflate your debt significantly if you’re dealing with a sizable balance. Further, the APR can be in excess of 20 percent should you keep the card afterward and use it to make purchases.
This terrain can be negotiated successfully if you’re cognizant of the land mines. However, you’ll suffer greatly if you make a wrong step.
Trading credit card debt for a personal loan will almost always net you a lower interest rate, which in turn could translate into a lower total repayment amount. What’s more, personal loans are typically unsecured, so you’ll be exchanging like for like in that regard.
There is however a rather significant catch.
Your credit score will need to be strong to qualify for a rate that will make this tactic worthwhile. If your credit score won’t let you get a significantly lower interest rate, the personal loan might wind up costing you more. Plus, you’ll typically run into loan application and processing fees, so you’ll need to take those expenses into consideration as well.
The Bottom Line
So, should you borrow to pay credit card debt?
The answer is yes — under certain circumstances. Debt consolidation (which is what each of these strategies really comprise) can be an effective means of dealing with credit card debt. However, you have to be aware of the pros and cons of each approach so you can select the method most likely to benefit your situation.
It is important for you to use reputable debt relief companies if this is the direction you plan to take.
Now, with all of that said, making a concerted effort to change the behaviors that created this need is equally important. Conducting a consolidation yet continuing to use your credit cards as you did before will set you up for an even larger problem down the road.