Credit Card Debt Repayment Trap

Getting out from under and eliminating credit card debt is a great goal that takes commitment and a balanced plan of action. However, when many of us decide to take on this goal we look to methods that could risk our whole financial wellbeing. In reviewing your options do not fall into either of the below repayment traps.

Home Equity Loan or Line of Credit

There are an alarming number of offers today on the Internet referring to getting out of debt. These experts want you to believe that a home equity loan or line of credit is your best option to get out of debt. This is the furthest thing from the truth.

The interesting thing about credit card debt is that it is an unsecured debt, meaning there are no assets to back the debt with. This is a high-risk investment for the lender, and if you fail to pay what you owe they lose what they loaned you.

However, a mortgage, home equity line of credit, or home equity loan is a secured debt. Your home is the collateral backing the loan. Which means if you default on the loan you could lose your home to the lender.

By using a home equity loan or line of credit you are trading an unsecured debt for a secured one. If a life changing event such as death, loss of job, sickness, etc. happens you could fall behind or worse not be able to make payments. In this circumstance your lender may force you to sell your home in order to pay the note. Many times what happens is that your home is sold for less than what you have in loan amount, but you are still required to pay the difference.

401(k) Loan

The second repayment trap is taking a loan against your 401(k). This is an extremely risky proposition that comes with tax penalties.