Should I get a loan to consolidate my credit card debt?

Many consumers, facing mounting credit card debt, seek debt consolidation as a possible remedy for their situation. Getting an unsecured debt consolidation loan these days is practically impossible, so they turn to secured debt.

Using a secured loan to consolidate credit card debt usually means refinancing one’s home or getting a home equity loan and using that money to pay off credit cards. This is a terrible idea, and we cannot stress it enough; do not use secured debt to pay off credit cards.

It may seem attractive to obtain debt consolidation in this manner; you pay off a raft of credit card balances, and are left with one higher mortgage payment or a home equity loan payment. That makes things more simple, right? We disagree. This “solution” is really a recipe for disaster.

Here’s a basic principle one should never violate: Do not trade good debt for bad. When you use mortgage debt (good debt) to pay off credit cards (bad debt), you’ve put your home on the line and left yourself with a wallet full of credit cards with zero balances. There’s nothing to stop you from maxing all of them out again, leaving you in the same situation you were in before, except now you don’t have any home equity left to tap into, and you could lose your home if you can’t manage all of your debt payments.

We’ve seen this play out over the last decade. It’s part of why we saw a mortgage meltdown and credit crunch; too many people took advantage of favorable interest rates to refinance their homes, convert home equity into cash, and use that cash to pay off unsecured debt. They had achieved debt consolidation—briefly. Now, the foreclosure rate continues to rise, and many of the people who refinanced a few years ago are in serious trouble.

We urge anyone considering debt consolidation to pay off his or her credit card debt to eschew a mortgage refi or other secured loan. Instead of loans, achieve debt consolidation by consolidating your debt payments.

The counseling session is free, and the counselor can help you understand all of your options. It can’t hurt to take an hour to get free counseling before you make up your mind. In the end, you’ll see the wisdom of using either a self administered repayment plan or consolidating your debt payments with the help of a nonprofit consumer credit counseling service. Choose the method that leaves you with no credit card debt and doesn’t put your mortgage in jeopardy.