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Thread: Which is the better debt-consolidation idea?

  1. #1
    Chicagoeditor
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    Default Which is the better debt-consolidation idea?

    Say you have 10K of credit card debt.

    Is it better to:

    1. Transfer that balance to a 0% (till Dec. 08 card, which is then fixed at 9.9% APR)

    or

    2. Use a 6.5% home equity loan to pay off the credit card balance?

  2. #2
    God/dess LuckyOne's Avatar
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    Default Re: Which is the better debt-consolidation idea?

    Transfer the balance to a 0%.

  3. #3
    Banned Melonie's Avatar
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    Default Re: Which is the better debt-consolidation idea?

    well you need to check the fine print on that 0% teaser rate card. Many of these offers do indeed offer 0% interest for 6 months or a year, but they will also charge you a 3% fee for transferring a balance from another card. So your $10k transfer would also result in a $300 fee being added to the 0% card balance.

    Another thing to consider is the cash value of any tax deduction on interest paid which would result from using a Home Equity loan, for which the credit card offers no similar deduction. This of course is a function of your specific effective federal and state income tax rate. Of course this doesn't work the same if there will be additional fees associated with the issuance of the Home Equity loan.

    My gut feeling is that if you factor in a 3% credit card transfer fee, and if you also factor in a 33%+ federal plus state tax rate meaning the HEL interest deduction will reduce your 6.5% HEL interest rate to the equivalent of 4.5% , you'd be better off with the Home Equity loan if there will still be an unpaid balance present beyond the end of 2008. If you're sure that you can pay down the $10k before the end of 2008 the teaser rate credit card is probably less expensive despite the $300 fee.

  4. #4
    Chicagoeditor
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    Default Re: Which is the better debt-consolidation idea?

    Thanks for the insights, ladies.

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    Veteran Member StuartL's Avatar
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    Default Re: Which is the better debt-consolidation idea?

    If you keep making the same payments to the 0% card as you are to the current card, how much could you pay off in that time? If you could come close to clearing it, isn't that the way to go?

    You didn't add the expected term of the home loan. That will be an important factor in this...

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    Default Re: Which is the better debt-consolidation idea?

    There are also closing costs, etc for a home loan (possible appraisal). You may want to verify what charges are added onto the home loan vs. the charges for the credit cards (and other stuff Mel mentioned) and go from there.

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    Default Re: Which is the better debt-consolidation idea?

    The question is, how much can you commit, per month, to paying down that $10K in debt? If you can sacrifice some discretionary spending in the next 10 months, and put down a good 1K, then the CC is a good idea. The possible $300 transfer fee is almost certainly less than closing costs? Although there is no definitive answer.

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