If you carry balances on multiple high-interest credit cards, you may be considering a debt consolidation loan. While getting rid of credit card debt is always a good idea, you need to be cautious about how you do it.
A debt consolidation loan usually takes high-interest unsecured debt – like credit cards – and rolls it into a single loan. The lender will want security against that loan debt, and here’s where things get sticky.
While consolidating credit card debt can get you out from under high interest rates, using your home as security for the consolidation is not always a good idea. If you default on credit card debt (and we’re not advocating that you do so), the worst result will be a lower credit score. Default on a debt consolidation loan that you’ve secured with your mortgage and you could, in a worst-case scenario, lose your home.
Still, rolling credit card debt into a mortgage has its advantages. Home equity loans and refinance loans typically have much lower interest rates than those offered by credit cards, which are usually in double digits. Plus, the interest on a home loan may be tax deductible. The savings can be significant.
If you’re disciplined about your finances, avoid running up additional credit card debt, and stick to your plan for quickly paying off the debt, consolidating your credit card debt with a mortgage could work for you.
It’s a tough call, and one that only you can make. Before you decide anything, use all available resources, including the Internet and credit advisors, to evaluate whether a debt consolidation loan is right for you.