Today’s guest post is from Jonathan @ Master Your Card.  A neat site for getting out of credit card debt.  This is a very interesting post about credit card debt.

So you’re buckling down in anticipation of the upcoming recession.  You’re frantically looking for ways to streamline your finances so when the time comes for the proverbial financial belt-tightening you’ll be ready.  You may have already considered consolidating some of your credit card debt, and if you own your home then you may have started eyeing the relatively alluring concept of a home equity loan.  After all, what could be better than consolidating all your credit card debt into one neat little loan that might actually give you a tax deduction?

“Well, heck, where do I sign?” you may be asking.

Slow down.  While an equity loan to consolidate credit card debt may seem like the most brilliant idea since sliced bread, you need to really take a look at what you’re getting yourself into.  Yes, an equity loan can be a God-send in some situations, but in other situations it may be a ticket to foreclosure.

Yes, foreclosure.

This isn’t to say that an equity loan isn’t a good idea.  What you need to know, however, is that an equity loan is no joke.  You can’t default on this loan.  If you default on your credit card, you get annoying phone calls from creditors that you probably don’t answer anyhow.  If you default on your equity loan, you lose your house.

Look at it this way: imagine that you’re pretty liberal with your credit cards and you use them for everything.  You go to the movies, you use your card.  You fill up your gas tank, you use your card.  You buy a pack of gum, you use your card.  After years of this spending behavior you consolidate your credit card debt onto an equity loan, but you miss some
payments and the next thing you know you’re in way over your head.  You can’t catch up, and since the equity loan uses your home as collateral the inevitable occurs: you lose your house.

In essence, you just lost your home because of some gum you bought a few years ago.  How messed up is that?

Equity loans to consolidate credit card debt aren’t all bad.  They work well for certain people:

1. People who cut up the cards they consolidate and close the accounts. If an equity loan gives you a fresh start complete with a new attitude toward your finances, then that’s a good thing.

2. People who have equity to spare.  With some areas of the country experiencing real estate value depreciation, it’s not a good idea to max out the amount of money you owe on your home versus how much it’s worth.

3. People who don’t view their homes as bank accounts.  You shouldn’t get into the habit of perpetually turning to the equity in your home to bail you out of financial trouble.  Too often homeowners get into the habit of racking up bills, paying them off with an equity loan, then racking up more bills, then paying them off with another equity loan, and so on and
so forth.  It’s a vicious cycle.

It isn’t Magic…

Using an equity loan to consolidate your credit card debt can be a good idea as long as you don’t go on with business as usual with charging up every little thing on your credit cards.  Use it as a fresh start and approach your spending in a more cautious way.

If you need a reminder of why it’s important to not go crazy with your credit card spending after you consolidation, then walk outside and glance back at your house.  You’ll be looking at a dramatic visual reminder of what you’re willing to risk in order to charge up your cards like a maniac.