Using Home Equity to Eradicate Bad Debt


The average American carries $15-$20k in bad debt, according to This can be from credit cards or merchant and store accounts. Basically, unsecured debt is bad debt because there's nothing to back it up with. If you default on the payments, the debt becomes toxic, rarely ever paid off or fully recouped by lenders.

Unsecured debt carries a very high interest rate because of the high risk rate to the lender. Therefore, it usually follows you around for quite some time. If you own your own home and have plenty of equity, there's a simple and straightforward solution that we'll explain how you can leverage this equity and use it to consolidate any bad debt that you are currently carrying.

Assess Your Debt

Use a spreadsheet and carefully list out each credit account and the amount owed. Next, tag the interest rate and the minimum monthly payment. Factor what that payment is combined for all of your debts each month. Chances are it's a sizeable monthly encumbrance. You can use this loan calculator offered by Bankrate to learn how much you are actually tendering in interest and fees annually. Now move on to step two.

Access Your Equity

Explore your options with a home equity loan that's locked in at a low interest rate to pay off all your bad debt with. Get rid of all that debt in one foul swoop with a lower interest and longer term, secured loan. Not only will your credit score skyrocket, but you will save thousands per year in interest and fees, too.

Bear in mind that you will need to retain a substantial amount of equity in your home for this to be a feasible scenario. Also bear in mind that you will incur closing costs, which can add a few thousand in fees to your financed amount.

Why It Makes Sense

If you do choose this route, you will have also consolidated your payments into one easier monthly payment as opposed to many of them; your mortgage payment. When you compare the interest rate that's being offered on your home loan to those that are offered by any credit card, it often makes good sense to consolidate. Just one year of interest that you are paying on $20k in debt justifies the move alone. Now imagine what the savings add up to over five or ten years or longer.

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