Is Paying Off Your Credit Cards with a Home Equity Loan a Good Idea?

One of the things still being touted in television and radio ads is how easy it is to pay off your credit cards when you get debt consolidation with a home equity loan. And while this does work for some people, right now paying off your credit cards with a home equity loan may be a bad plan.

Unsecured debt

Right now, your credit cards represent unsecured debt. This means that you have no tangible assets attached to it. It means that if you don't pay, then your creditors can try to collect, but they can't take something (like your house or car) away from you. They can damage your credit score -- which can be painful in terms of future financial opportunities -- but there is little else they can do.

Secured debt

Secured debt, on the other hand, is the complete opposite. You have something -- a house or a car or some rare heirloom -- as collateral to ensure the payment of your loan. Secured debt is something that lenders and creditors can come after if you fail to pay. When you have secured debt, the item you use as collateral is the rightful property of the lender in the case that you default.

Exchanging unsecured debt for secured debt

You can begin to see where there might be a problem with paying off your credit cards with a home equity loan. You are taking debt that was once unsecured, and then attaching it to your home (your most valuable asset). Instead of protecting your home in the case of collections, you are now putting your home at risk. This is a serious matter. While paying off your credit cards with a home equity loan can be helpful, if something unforeseen happenings, and you can no longer make your payments, your house is on the line.

Besides, it is becoming more difficult to get a home equity loan to pay of credit cards anyway. With home values falling, many lenders are wary of the home equity loan. And you should be, too. Even if you do get a home equity loan, what if your home value falls? Will it end up making you upside down on your equity? Many people are finding that their home equity loans are now the reason that they have negative equity in many declining markets.