Utilizing a home equity loan or secured line of credit is an option to avoid higher interest consumer loans – or worse – credit cards for financing costly consumer durables such as air conditioning systems, furnaces or, perhaps, appliances. Avoiding high interest payments and carrying credit card balances is an integral part of managing household debt.
In an informative video interview with the Globe and Mail’s Rob Carrick, Gail Vaz-Oxlade, host of the financial makeover show Til Debt Do Us Part and author of the Canadian bestseller Debt-Free Forever, discusses how to tackle personal debt – from your credit cards to your mortgage – as a preliminary to successful financial planning.
Ms. Vaz-Oxlade asserts that there aer both good uses and poor uses for a home equity loan or line of credit. “If you are using your line of credit to renovate your home and that is going to mean your asset appreciates, that’s something good.” However, she notes, “if you are using your line of credit as an emergency fund, or you are going traveling on your line of credit, that’s just stupid.”
She advises that, “all kinds of consumer debt should be paid off in three years or less – with a big emphasis on the less.” But, if the loan or line of credit is used, as an example, for investment purposes, that, she says, “is a different kettle of fish.”
And, importantly, she tells Mr. Carrick that carrying a credit card balance, “is just plain stupid”. Interestingly, she observes that the minimum payment amount displayed prominently on your credit card bill is a psychological tool. It is meant to assure consumers that it is okay for them to carry over their balance at interest rates significantly higher than other types of loans, such as a home equity loan, thereby prolonging the debt and ensuring high interest payments to the credit card company.
If you are serious about avoiding or minimizing unnecessary consumer debt, consult an experienced and knowledgeable mortgage broker to discuss whether a home equity loan or line of credit is a smart option for you and your specific circumstances.
