Right now, I’m still sitting on about $12K of credit card debt. It just doesn’t seem to go down. There is always something putting pressure on me to run them back up. Since I have utterly failed on all my goals this year, I have a new plan formulating for 2010.
I am thinking of rolling all the debt into my HELOC, cutting up my credit cards and making huge payments towards the HELOC. That reduces the number of accounts to manage and I get to take a bigger line item deduction because of the interest on the HELOC.
I’m going to wait to do this till January when my low rate balance transfers expire. The interest rate on the HELOC is holding steady at a very low APR. The problem is that I am afraid that by doing this, I am going to push the total debt on the condo to over its purchase price. That doesn’t seem like a good idea (for various tax reasons). I worked on a few numbers and this could be a viable strategy but I am not confident this is a good decision.
Such is the ongoing challenge of this blog.
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{ 10 comments… read them below or add one }
I’m confused you have 16k in credit card debt yet you just charged 10% of that for plane tickets? Would it be so bad to spend a long weekend with your parents on a nonpeak time. Saves 700 right there. I understand there needs to be debt/life balance. That’s something I struggle with. If you just buckled down for 6-8 months you could have that paid off!
I by no means intend to criticize you. As I always make decisions similar to this and have a hard time forcing myself to do otherwise. I still haven’t figured out how to cut back on alot of things. I’m just trying to put it in perspective. If you save $100 just 160 times your debt would be gone!
Sorry I misread. Only 12k is even better!
At the risk of sounding like a Suze fanatic….
What if something really bad happens and your can’t make your HELOC payment…. AND YOU LOSE YOUR HOUSE! Worst case scenario you can’t make your CC payments…. not the end of the world, but if you wrap up the 12k in a HELOC and can’t make the payment for whatever reason… just sayin.
Keep up the good work! I enjoy reading about your progress.
I’m with Nadia (and Suze) here. In this economy — actually in any economy — putting your house at even potential risk is something I’d personally never do and would advise almost everyone — including you! — not to do. I know $12K is a huge amount that seems insurmountable, but consider going to a reputable credit counselor and working on ways to reduce that credit card debt before linking it to your home.
Do problems kick in when you push the use of your HELOC over the purchase price, or over the current market value? Just thinking that if the value is higher than the purchase price, you might be okay.
As for the wisdom of this…I don’t know. I think it depends on your financial self-discipline.
To answer a few loose ends:
1. @all – The HELOC is on a condo I do not use as my primary residence anymore. My emergency fund is a little thin, and I’m not not in danger of losing my job any time in the next 5 years. I work in federal contracting and I’m lucky enough to be too valuable to fire. That’s the whole point of doing what I do. I also don’t max out my 401K, but I am trying to do that and balance my debt repayment.
2. @MoneyMateKate – There is a problem when you are overleveraged on the property from the original purchase price. You cannot deduct the full mortgage interest, only the portion for the original home price. The math gets more complicated. That’s the only reason I’m hesitating.
My grandma thought she would try that (rolling tons of CC debt into a HELOC)…3 times now, and she’s still back up to about 20k in CC debt and still has about $50k left to pay on a mortgage from 1960 on a house she paid $50k to build, at most. It becomes a never-ending cycle if you always think you can use your HELOC as a way out.
I have a similar problem. I always seem to carry $2-3K in credit card debt, even as my emergency fund increases (and it’s still increasing. even though I am currently unemployed!). I pay off the debt maybe twice a year and I still run it back up. Before I started doing this a few years ago, I would reach into my savings account and deplete it by $2-3K every six months. I can’t figure out exactly why this happens but I know it’s a common phenomenon. I’ve thought about physically separating my emergency and “regular” savings accounts and cutting up my cards entirely. I agree with the others who say not to roll it into a HELOC. I think you can be a good saver/investor and still have issues with credit card debt, and you will be locking your credit issues in with your mortgage if you go that route. It’s a problem, and I’ve come to realize that. I am paying interest to a credit card company because I’m giving myself permission to do things I really can’t afford. I consider my savings to be just as important as bills, so if I am diverting money from savings to cc’s, I am robbing myself.
You seem to be saying that as long as the credit cards are there you will use them to spend money that you otherwise wouldn’t spend. I guess the real question is whether cutting up the credit cards will really help. After you’ve done that, maybe you’ll spend on the HELOC instead or end up borrowing from your 401k? I know these are harder than the credit card… Seems like you earn good money, so why are you spending so much?
I took out a $100,000 HELOC at 3.25% and paid down $100,000 of my principle rental property mortgage that costs 5.25%. As a result, I save at least 3 years off the mortgage, and $2,000/yr in interest.
The strategy I employ is called “Going Broke To Win Big: HELOC Edition”. You should have a read if you want to use your HELOC for anything.
Financial Samurai