For a senior couple who has contemplated turning to credit cards to make financial ends meet, a home equity-based option – such as a Home Equity Line of Credit (HELOC) or a reverse mortgage – would likely serve their financial goals better while avoiding many of the pitfalls of credit card debt. This is according to finance columnist Liz Weston, in a new column published at the Los Angeles Times.
“My husband is 68, I am 70, both of us are retired and on Social Security,” the reader writes. “We have little in savings. My husband wants to charge $10,000 to a low-interest credit card to pay for a new furnace and water heater. He plans to pay the minimum each month and at the end of each year transfer the balance to a different credit card with low-interest.”
However, low interest on certain credit cards generally expires after a certain period of time, which should be taken into consideration when planning for how long the debt will be carried, Weston says.
“You may not get a high enough limit to make all your purchases or you could use up so much of the limit that it causes damage to your credit scores,” she writes. “(Scoring formulas are sensitive to how much of your available credit you’re using, and ideally you wouldn’t use more than about 10% to 30% of your credit limits at any given time.) When you apply to transfer your balance to another low-rate card, you’ll run similar risks.”
A better option could be the incorporation of home equity.
“HELOCs have variable rates, but you would have a source of funds you can tap and repay as needed (much like a credit card, but backed by the equity in your home),” she says. “Home equity loans typically have fixed terms and rates, so you can borrow what you need and pay off the debt over time (often 15 to 20 years).”
Another viable option for these people could be a reverse mortgage, she says.
“If paying back the money would be a hardship, a reverse mortgage might be an option,” she explains. “Reverse mortgages can be complicated and expensive, however, so talk to a housing counselor approved by the Department of Housing and Urban Development before proceeding with one.”
Weston in the past has previously touted home equity broadly and occasionally reverse mortgages specifically as a resource that can be used to delay the taking of Social Security, as well as an option for older people who had prioritized making mortgage payments over saving for retirement.
Read the new column at the Los Angeles Times.