Why It's Smart to Consolidate Higher-Interest Debt
Consolidating your debt into a lower-interest monthly payment with a home equity credit line has many advantages.
Household debt in the United States has increased by a whopping 11 percent over the course of the past decade as more and more Americans continue to get in over their heads. According to a 2016 study1, the average household with credit card debt has balances totaling $16,748. Meanwhile, the average household debt, including mortgages, is $134,643.
According to that study, U.S. consumers owe $779 billion in credit card debt, $8.48 trillion in mortgages, $1.16 trillion in auto loan debt, $1.31 trillion in student loan debt, and $12.58 trillion in any kind of debt.
The main reason for the dramatic increase in debt among Americans is a rise in the cost of living, which has reportedly outpaced income growth over the past 13 years. According to the study, Americans are paying an average of $1,292 per year in credit card interest alone. If you have multiple sources of high-interest debt, it's a good idea to consider consolidating it all into a lower interest product.
A home equity credit line (HECL) is a viable option for this purpose. They are generally low-interest products because they’re backed up by the equity in your house. For this reason, they're great for paying off credit cards and unsecured personal loans. Rates have even seen historic lows in recent years, so you might be able to save money by moving debt from multiple credit cards to a HECL.
HECLs are typically thought of as a way to get money to make home improvements, but the reality is that they can be used for so much more. Nevada State Bank, for example, encourages customers to use an HECL for making large purchases, taking a well-deserved vacation, paying for education expenses, and yes, consolidating high-interest debt.2
Benefits of a home equity credit line can include: no origination fees, closing costs, or third party fees; low Interest-only payments; and easy access: just write a check, transfer online, or visit a branch. You can lock in a low rate and have fixed monthly payments. You can also choose from a variety of terms to best suit your needs. Using a HECL to consolidate high-interest debt is practically a no-brainer, especially if you can repay your loan in a timely fashion.
"If you're hopelessly drowning in debt, know that you can't negotiate any lower interest rates with your credit card companies or creditors, or if the math works out, a debt consolidation loan may be a good decision for you," says Lifehacker's Alan Henry. "Similarly, if you're in serious trouble with high interest rates, high monthly payments (that you're having trouble with already), and too many bills, a debt consolidation loan might help."3
Another nice thing about consolidating your debt is the simplicity it brings to your life. Instead of having multiple payments to make and plan for, you’ll now have just one to worry about, which should reduce some stress and help tremendously as you're doing your monthly budgeting.
Better yet, you can improve your credit score if you take out a home equity credit line to consolidate your high-interest debt. As NerdWallet's Lindsay Konsko notes, "If you choose to consolidate with a personal loan, you’ll likely see a jump in your score within a few months. This is because, in doing so, you’re quickly reducing your credit utilization ratio. Your credit utilization ratio is the amount you owe on your credit cards relative to the total amount of credit you have available. It heavily influences a whopping 30% of your credit score, and if you have several maxed-out cards, yours is probably sky-high."4
The bottom line is that high-interest debt can take a large toll on your financial well-being as well as your mental well-being as stress keeps you from enjoying life to its fullest. Consolidating your debt into a lower-interest monthly payment can save you a lot of grief, not to mention a lot of money.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.