Alternatives Offered to Home Equity for Debt ReductionAlternatives Offered to Home Equity for Debt Reduction
Poorly managed credit card use can result in thousands of dollars of credit debts, according to financial experts. With credit cards easier to obtain now more than ever, experts are cautioning consumers, particularly young Americans, to be aware of the pitfalls of credit. If left unattended, hefty balances can mean more headaches for a cardholder in the prime of his or her life.
Most debt-ridden cardholders who realize their predicament often turn to obvious solutions to address their financial troubles. Industry analysts point out that most consumers turn to debt consolidation, personal loans, and even home equity to help pay off their balances and reduce credit debt. While commendable, some experts warn that turning to these traditional solutions can have dire consequences, especially with the economy still on shaky ground.
For instance, analysts explain, home equity can be one of the most popular solution to address debt troubles. By offering his or her home as collateral for a loan, a cardholder can pay off his dues and start with a clean credit slate. However, the volatile housing market and the relatively high unemployment figures can pose problems. If the housing situation gets worse, a consumer with home equity for debt reduction can risk losing his or her home. Losing a job can also increase the chances of cardholders not being able to pay the interest that comes with home equity, bringing them one step closer to losing their homes.
However, there are also benefits to using a home as collateral to pay off credit card balances. For one thing, the interest paid on the loan is actually tax-deductible. This means that cardholders can get back the interest they shell out for their loans. Also, the interest rate consumers have to deal with is constant and unchanging for the duration of the home equity loan. Unlike other loans, the interest rates do not fluctuate. While these perks may seem enticing, analysts explain that with the unstable housing market and the economic slump, taking out a home equity loan to finance a debt reduction scheme can actually turn into a nightmare.
There is, however, another alternative. Financial specialists advise young American professionals to set aside a portion of their extra income to settle their growing debts. Of course, cardholders first need to admit that they are spending more than what they earn and break free from the vicious grip of their credit cards. Next, consumers have to deposit a certain part of their extra income from bonuses, raises, and other sources into an emergency fund. Typically, setting aside half of any extra income for debt repayment and reduction is advised. Using this fund, cardholders can then choose which balances to tackle first. Experts advise paying off balances with the highest interest rates to avoid incurring more debts.
