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Dear Debt Adviser,
I have an $8,000 "write a check now" offer from a credit card at 2.99 percent until paid off. There is a 3 percent
one-time fee. I would like to use this to pay off half of my home equity loan, now at 5.75 percent. I cannot see a
negative here. Is there any I'm missing?
-- Maria
Dear Maria,
People often write to me asking, "Can they do this to me? Is this legal?" The main reason they ask me these questions
is because they don't read the fine print included in their cardholder agreements.
It's not their fault completely. We live in a society where no one is to blame for anything and the
concept of being held responsible for one's actions is just plain unfair.
I am delighted that you thought to investigate before you sign. In my opinion, you have a bunch of
potential negatives here. They may or may not pertain to your situation now. However, they may become relevant if
your situation changes.
First and most important is that "until paid off" really means "until or unless you make a late payment."
If you are even one day late making a payment, all bets are off and the card issuer can and likely will raise your
interest rate, perhaps to as much as 30 percent.
Also, be sure to find out if the card issuer can raise your rate if your credit score goes down or you
trigger a universal default clause by being late on another bill with another lender.
Second, you need to read your card agreement and determine how payments are applied to your account.
Normally, if you are currently carrying a balance or use the card for purchases, your payments will be applied to those
balances with the lowest interest rate first.
For example, your $8,000 loan is at 2.99 percent; all new purchases are at the usual rate -- say 18
percent -- and any cash advances are at 21 percent. Until you pay off the lowest interest item, no payment is applied
to the purchases or cash advances.
So if you currently have a balance or plan to use the card while you have any of the $8,000 outstanding,
you could be paying a high rate on your purchases and cash advance balances for years before you can pay those down.
Third, you are adding another payment to your monthly expenses. Because you have a home equity loan, you
pay a set amount each month. You'll still be paying the same monthly payment on the balance of the loan once you move $8,000
of it to your credit card.
Do not take the plunge until you make sure the additional payment to the credit card will not cause you
any problems with on-time payments for your other monthly bills. I'd feel better about this if you were paying off the
equity loan completely, not just borrowing to pay an existing debt.
You would gain some positives by taking this action. For example, you would convert half of your home equity
loan, which is secured, to an unsecured loan with a credit card issuer. This is beneficial because defaulting on a secured
loan could cost you your home.
Not only is the loan unsecured, but you have increased the equity available in your home at a time when
housing prices are falling.
If you go ahead, my suggestion is to set up automatic payments from your bank account to be sure you are
never late and pay down all your balances before you add the $8,000. Then, cut up the card and don't get a replacement until
the balance is paid off. You don't want to use this card even by accident until then.
Now you know the risks so you can make an informed decision to weigh the rewards.
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