Question:
Dear Steve,
I have 25K in high-interest credit card debt. What’s the best loan to take care of it? Personal vs. home equity? Or what would you suggest?
I do not know the best way to pay it off or down to a manageable level. Any help you could provide will be greatly appreciated.
I don’t want to go to a debt reconciliation program. I do not want my credit to be dinged, and I’m not in financial trouble yet.
Dianne
Answer:
Dear Dianne,
Thank you for reaching out to me for help and advice.
In reading your question, a couple of points jumped out. First, you said you have $25K of credit card debt, and that sounded as if it had been building for some time. You also said, “I’m not in financial trouble yet.”
When people begin to feel they have a debt problem, the obvious point of focus is to deal with the debt pressure. However, that is not where the real problem lies. The debt is the symptom and not the actual problem.
Something has led you to this point. It might have been slowly putting expenses on credit cards to cover obligations.
Without looking into what led to this point, the chances are high you will get a loan and slowly find yourself back in the same spot.
You might say that won’t happen to you, but I’ve seen it happen repeatedly. It’s human nature, not purposeful intent.
The big difference between a personal loan and a home equity loan is the personal loan will be a much higher interest rate. The home equity loan will be at a lower interest but might carry fees. Shop around and you can find some that don’t have fees. Additionally, if you fail to pay the home equity loan, you put your house at risk of foreclosure.
You also mentioned paying down to a manageable level. For me, the manageable level is not carrying a balance. I have no idea what a manageable level is in your definition.
I’m a big fan of building a solid financial future while digging yourself out of a hole. That means focusing on building a savings account and saving now for retirement.
If you want to figure out the cheapest loan to get, then a lower interest rate loan will typically require more collateral and put more assets at risk of loss if you default.
In general, the broad brush debt-relief options outside of just paying down the debt are shown below.
Homework
Think about what the destination is here. Where is it you want to wind up? Once I know that, we can build a plan or draw a map to get there.
Is your goal more financial security, a solid financial foundation, or to make the debt pressure diminish?
Post your updates in the comments below.
You are not alone. I’m here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don’t give up.
