Home Equity

Home Equity Loans Are Better for Your Credit than Consumer Credit Counseling

You find yourself in a financial bind. You may have even missed a payment on one or more of your credit cards. What do you do? Some people consider consumer credit counseling because they have heard that these services can help alleviate debt problems. But, is that the best solution?

At one time the consumer credit counseling (CCC) service industry was dominated by the National Foundation for Credit Counseling, whose nonprofit affiliates negotiated lower interest rates and payment plans for people who had fallen behind. However, a rise in consumer debt in the 1990s spawned hundreds of competitors. Some do a good job of negotiating repayment plans. Others charge huge upfront fees and pocket much of the money that should be going to pay off creditors.

Of those in debt repayment plans, said Lydia Sermons-Ward, spokeswoman for the National Foundation for Credit Counseling, about half were expected to successfully complete their plans. The other half were expected to drop out, with some of those filing for bankruptcy.

There are several other problems with consumer credit counseling services. For example, each credit card company will report you late even with CCC, and late payments lower your credit scores. If you're going through a "debt settlement" specialist, credit companies report settled for less and not paid as agreed for your accounts. The worst problem is that many home equity lenders, mortgage brokers and banks consider consumer credit counseling just like a bankruptcy.

Another way you can consolidate your bills is by refinancing your high-interest credit cards and personal loans into a home equity loan (second mortgage). Home equity loans offer lower interest rates than what you pay on your credit cards, especially if you are paying universal default rates. Gerri Detweiler, author of The Ultimate Credit Handbook, says that if you're one day late on any payment to any creditor, you could be subject to a default rate as high as 29.99 percent on many others.

Instead of taking these chances, you should take advantage of today's lowered interest rate and get a home equity loan. You will not only get piece of mind knowing that your past-due debts are paid, but you will also enjoy lower monthly payments and up to 100% tax deductibility on the interest you pay on your new second mortgage loan.