Credit Card Debt? Don't Tap Your Home Equity to Pay it Off

(MoneyWatch)  Some financial advice isn't timeless. Consider a pitch I recently received from a trusted source. The organization recommended people pay off their credit card debt with a home equity line of credit. A few years ago, mortgage brokers and even some financial advisors argued this was a smart move. But now that home values are falling, foreclosures are rising, and folks are losing their jobs, I can't think of a worse strategy for someone swimming in debt.

Just in case you're tempted to tap the equity in your home, I hope you'll reconsider. After all, why would you want to trade one type of debt for another? It's true that interest rates on a home equity line are far lower than on the average credit card -- 6% versus 11% -- but you'll still owe a lender money. Plus, you have also created a new problem. Should you lose your job and find that you can't make your payments, you could lose your house.

Making matters worse, let's not forget that banks are a bit nervous today and don't want to take on too much risk. While they may allow you to open a home equity line of credit, they could just as easily decide to close it or reduce its value next year and your credit score could take a beating. (Losing access to credit lowers your credit score significantly.)

Then there's human nature. Be honest with yourself. Do you really think you'll be able to control your spending habits and not run up credit card debt again? Some people have the restraint and some don't. If you're going to allow yourself to charge purchases again and carry a balance, don't even think about tapping your home equity. In a few months you'll just end up with twice as much debt.

What's a smarter move? Work toward paying off that credit card bill as quickly as possible. First try calling the company to see if you can get your interest rate lowered. If that doesn't work, consider transferring the balance to a lower interest rate card. Then work as diligently as you can to whittle down the amount you owe. If you're really in trouble, look for a reputable credit counseling firm that can help you negotiate with your creditors. But please don't think there's some easy solution waiting for you. If we've learned anything from the credit and housing crisis it's that seemingly simple fixes can cause a lot of lot of misery later on.

Commerce Bank Card image by The Consumerist, CC 2.0.