Exchanging Unsecured Debt for Secured Debt

Over the weekend, I wrote about how my credit card company is trying to get me to refinance my home with them, and take out some cash. For me, this is an obviously foolhardy move. Such offers usually go straight through the shredder.

But Sean left a comment that I feel is very pertinent to the idea of unsecured debt and secured debt:

Credit cards are “unsecured debt,” meaning that if you default or go bankrupt, they can’t take your house, car or stuff. They are last in line, behind secured debt, like your mortgage. When they see people getting in trouble, they offer nice guy home-equity loans. Take them up on it and guess what? Their debt is now secured – and tied to your home. Before, they could do nothing to you, really, but mess up your credit rating.

Don’t exchange unsecured debt for secured debt

In uncertain financial times such as these, it may seem as though a home equity loan to pay off your credit cards is a gift. It’s not. Credit card companies offer these deals in order to ensure that they will get their money. Even though many people who pay off their balances get these offers, companies also specifically target those who appear to be wracking up balances, or paying them off very slowly.

It’s a great situation for the credit card companies. They ensure that you pay off your credit card balance (freeing it up for more debt) and get to finance a larger loan — secured by your home — in the bargain.

image credit: sxc.hu