I recently got a question from a reader named Jennifer. Here’s what she wrote:
We have a lump sum of money that we are trying to decide what to do with. We have credit card debt and also some home improvements and repairs that we want to do. Is it better to pay pay cash for the home improvements or pay off the credit card debt and then get a home equity loan for the improvements and repairs?
Here was my reply:
If I were faced with this choice today, I would pay off the credit card debt because the interest rate is probably a lot higher than the rate on a home equity loan would be. Also, the interest you pay on a home equity loan is generally tax deductible, while credit card interest is not.
However, here are a couple of things to think about:
1. A home equity loan will be secured by your house, so if anything were to happen, your house is potentially at risk. Credit card debt is unsecured, so if you have to stop paying for any reason, what is at risk is your credit score/worthiness.
2. It is very, very, very easy to pay off credit card debt, take out new debt (i.e. the home equity loan) and then run the credit cards back up. That leaves you in a worse place than where you started. I know that because, despite our best intentions, we’ve done that several times over the years. If you think you’ll be tempted to do that, and if debt reduction is your goal, you might want to consider paying cash for the wall/pool and then being really aggressive about paying cards down.
I reminded Jennifer, and I’ll say it here too, that I am not an expert. I’m just a Family CEO who has done a lot of researching and had a lot of life experience in debt reduction.
Have you ever had to decide to place a sum of money one place or another? How did you decide?