I learned something useful while working at a bank. I actually learned many useful somethings while working at a bank. That is why you come back and read my blog, right?This useful something I picked up while trying to help someone out with a credit card issue they were having. I met with a woman to discuss how to lower her monthly payments and get her credit card debt paid off in full. She had a hefty load of debt (in the $20,000 range), but she had another powerful tool: equity.
We discussed two options for dealing with her credit issues. She did not have a great credit score, so she did not qualify for many loans that were not secured. She owed on two cars in addition to her credit cards, and I came up with an idea.
First, we opened a home equity line of credit, often called a HELOC. A HELOC works like a credit card with no card, but the interest rate is much lower than a normal credit card. Instead of a rate around 20%, we were able to give her a rate around 5%. This saves a lot of money on interest and helps pay the loan of much quicker.
We then transferred her debt from the credit cards and the cars (which she then owned free and clear) to the HELOC. She negotiated a slightly higher minimum payment to help her pay off the debt in two years. This was about seven years less than it would have taken had she made minimum payments on the credit cards. In addition, her payments were lower. It was a win-win for her.
She wanted to close her credit cards so she would not get into trouble again, but wanted to keep something in case of emergencies. Fortunately, the HELOC still had cushion room on top of the balance she transferred in. I attached a bank debit card to the account and, abra kadabra, she had a low interest, home equity credit card.
Since I am sure none of you have a lot of outstanding credit card debt, you can skip the middle part if you are interested in doing something like this. If you have a lot of equity, you can buy a car on the card and pay the low interest rate of a HELOC, which would probably save you a few bucks, or a few hundred, in the long run.
The best part is that there are lots of tricks. If you have equity, you can do a whole lot with it. You are never stuck with high interest rates if you own something valuable, like a home. Have you ever created a loan to order? Let us know in the comments.
