When Credit-Card Debt Is Better Than Home-Equity Debt

The Walkers bought their house in 2003 with a 100% mortgage, and now the two debts combined were more than the home was actually worth. "No lender would touch us," the 28-year-old from Broomfield, Colo., explains. "We were told that if we could pay off the home-equity loan, then we would be in a position to refinance."

Walker transferred the $7,000 home-equity loan to an American Express credit card with a 3.99% rate on balance transfers for the life of the balance. That's less than the 6% on their home-equity loan, even after factoring in the tax benefits the Walkers enjoyed. "Overall, we'll save $750," Walker estimates. "For us, it's no small change!"

Indeed, in the past several years, Americans massively pulled equity out of their homes, and used some of it to pay off high-interest credit-card debt. Back then, that made sense: Home-equity debt was as cheap as 4%, even cheaper when you factor in the tax deduction.

But the times are changing. The average home equity line of credit (HELOC) now stands at 8.7% and the average home-equity loan, at 8.2%, according to HSH Associates. Meanwhile, competition among the credit-card companies rages on. Attractively low rates on balance transfers — some of which are valid for the life of the loan — aren't difficult to find.

The result: If used under the right set of circumstances, Schatsky says, transferring home-equity debt to a credit card — however contrarian — can save homeowners big money.

When the numbers are right — meaning the interest rate is lower and you can afford the credit card payments (more on that below) — carrying credit-card debt is in fact safer than owing money to your mortgage lender, says credit expert Gerri Detweiler, author of "The Ultimate Credit Handbook." "If you're delinquent, a lender could move to foreclose with a home loan," she says. "With a credit card, it would move to collections and yes, you could be sued, but they can't take your house."

That said, such maneuvers aren't for everybody. You have to play by the rules and be aware of the potential traps. Here's what you need to know.

Say, for example, that you have a $10,000 home-equity loan. Assuming it's a 10-year loan, your monthly payment will be $101. (We crunched the numbers in our mortgage calculator.) But if you transfer the balance to a credit card that requires a 4% minimum payment, your first monthly payment would be $400. (As you pay down the balance, those minimum payments will go down.) So before you sign up for a balance transfer, call the card company and ask them what your first payment would be.

And while 0% APR offers may look tempting, be careful. Those typically last for six to 12 months. Once the promotional rate expires, you'll be hit with the card's regular interest rate, which can run 18% or higher.

Then, make sure the credit-card limit is high enough. Aim for at least twice the balance on your home loan, Detweiler recommends. This way, you credit score isn't likely to drop because of high utilization. (One of the factors that can bring your credit score down is to carry balances that are close to your available credit limits. More on this here.) When Walker accepted the card offer from American Express, she asked them to increase the limit to $20,000 from $10,000, so it wouldn't appear she owed too much. (She got approved for $30,000.)

And don't forget the tax break when comparing the interest rate on a credit card to that of your home-equity loan or line of credit. If your loan rate is 6.5%, for example, and you're in the 25% tax bracket, you're essentially paying 5.04%. (Crunch your numbers here.)