Dear Debt Adviser,

I am 27 years old. I have a mortgage, school loans and an auto loan. I also have about $20,000 dollars in credit card debt. I am able to pay all my bills every month. In most months, I am able to pay a little extra to each of my credit cards. I have stopped using my credit cards and I am trying to get my life back on track. My question is do I continue to pay off my credit cards like I am doing or should I look into a home equity loan?

— Amy

Dear Amy,

Before I get into any practical considerations, the parent in me needs to talk to you. You have accumulated a lot of debt for someone who is only 27. It looks like you have been spending about $100 a week more than you earn for a long time. I’m glad you have stopped spending, but I am concerned that any unexpected expense, illness or reduction in income could push you over the edge.

As part of your plan to get your debt down, I want you to simultaneously begin to save for an emergency fund. You can do this fairly painlessly by devoting half of any new income into a separate emergency savings account — half of your next raise, half of any bonus, half of any tax refunds. You get the idea. Set up the account so that money comes directly from your paycheck into the account. Using direct deposit from your paycheck greatly increases your odds of success.

Now, to your question, it is great that you have stopped using your credit cards. The first step in paying off credit card debt is to stop adding to the balances. So, you are already one step ahead. It is also great that you have enough income to meet all of your obligations and have some income left over to do with as you choose.

Your question is whether you should continue to pay down your credit card debt or obtain a home equity loan. An argument could be made for both sides, so let’s take a quick look at some of the positives and negatives of taking your unsecured credit card debt and converting it into a secured home equity loan.

Using home equity loan to pay off credit cards
Positives Negatives
Interest paid on the loan is tax- deductible. Unsecured debt becomes secured by your home.
Fixed interest rate is set for the life of the equity loan. If your home drops in value, you could owe more than your home is worth and not be able to move for a new job or other opportunity.
Lower interest rate and payment are available. A default could mean possibly losing your home.

Based on the limited information in your question and the current economic picture, I believe you would be better off paying down your credit card debt without a home equity loan. There are four reasons. One, if you continue to pay more than the minimum amount due, you should be able to pay off what you owe in five years or less — about twice as fast as you would with a home equity loan. Two, your home will not be placed in jeopardy in a tumultuous economy and job market. Three, as long as your credit score is above 700, should your current credit card issuer make changes in your cardholder agreement that you don’t like, you can opt out of the new terms, close the account and repay under current terms. You could also apply for a new card and transfer your balance to a different card issuer. And four, you’ll lessen the chances that you may become upside down on your mortgage, or owe more than the home’s value, which could keep you from selling your home to move for love or money.

At your age, the world is full of possibilities and opportunities. Don’t jeopardize this wonderful time by tying yourself down with debt obligations.

Finally, good luck!

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