Debt Q&A: Managing Student Loans, Credit Cards, and HELOCs Wisely
Managing debt wisely is one of the most important parts of your financial life. Laura answers six questions about how to handle student loans, HELOCs, and credit cards. You'll learn tips to protect your credit, use existing home equity, manage student loan repayment, and prioritize your personal finances in the right order.
Handling debt wisely is one of the most important parts of your financial life. Borrowing responsibly to attend college, purchase a home, or start a business, can be the ticket to growing your net worth and income for life. But taking too much debt or not understanding the consequences if you can't repay can cause a heap of stress and heartache.
In this post, I'll answer 6 questions that I recently received about student loans, HELOCs, and credit card debt. You'll learn tips to protect your credit, use existing home equity, manage student loan repayment, and prioritize your personal finances.
6 Questions & Answers About Debt
Debt Question #1
Alyssa U. says, “I’ve been listening to your show for a few months now and it’s really inspired me to be proactive with my finances. I improved my credit after it took a hit during an unpaid internship and now I want to help my boyfriend do the same. A friend suggested that I open a credit card with a low limit and add him as an authorized user—would that help him?”
Thanks for your question, Alyssa. You sound very considerate, but I’m going to caution you against adding anyone as an authorized user to your credit card. Even with a low credit limit, you could get stuck with way more debt than you’d like if your boyfriend doesn’t handle the card responsibly.
Authorized card users have no legal responsibility to repay debt, even for their own charges. The burden of repaying all debt falls completely on the card owner.
Instead, your boyfriend can easily build his own credit by opening a secured credit card. Secured cards work just like regular ones, except for having to put up a refundable security deposit, which becomes your credit limit. The card issuer holds the deposit as collateral until you close the account and pay your balance in full—or prove your credit-worthiness and transition to one of the company’s regular, unsecured cards.
The minimum required security deposit varies depending on the card you choose, but could be as little as $50. You may also be able to pay a larger deposit in installments over time, such as 60 or 90 days, before your secured card is issued.
The trick to using a secured credit card to build credit is making sure that the issuer reports payment data to one or more of the three nationwide credit bureaus (Experian, Equifax, and TransUnion). Don’t spin your wheels with a card that doesn’t. A history of making on time payments—even if they’re just minimum payments—helps build credit quickly.
The trick to using a secured credit card to build credit is making sure that the issuer reports payment data to one or more of the three nationwide credit bureaus. Don’t spin your wheels with a card that doesn’t.
Debt Question #2
Rick F. says, “My father is looking for ways to help me purchase my first home without handing over a large amount of cash. He owns his home and has a lot of equity in it. After listening to Money Girl episode #496 on getting a HELOC, I’m wondering if it would be okay for him to use a HELOC to help me with my down payment?”
The ideal use for a HELOC, or home equity line of credit, is to make home improvements that increase the value of your property. However, a homeowner with equity can use a HELOC for any purpose, even giving it away.
Debt Question #3
Sybil P. says, “I got a large tax bill for 2016 and have cash to pay it. But someone suggested that I take out a home equity loan instead so I can write off the interest next year. If my house is paid off, is this a good idea?”
As mentioned in the previous answer, you can spend the proceeds from a home equity loan or a HELOC any way you like, including your taxes. And as you mentioned, tapping your home equity comes with a tax break, which reduces the after-tax interest rate you pay.
When you spend a home equity loan or HELOC on home repairs or improvements, you can deduct the interest on a loan amount up to $1 million. But when you spend the funds on anything unrelated to your home, such as income taxes, a gift, or debt consolidation, you can deduct interest on a loan amount up to $100,000.
When you spend a home equity loan or HELOC on home repairs or improvements, you can deduct the interest on a loan amount up to $1 million.
If you have a healthy emergency fund, I’d consider paying some or all your taxes in cash. However, if doing so would leave you with too little cash, then borrowing against your home’s equity is a wise move. Just be sure to take as little as possible because if you can’t pay it back, you risk foreclosure on your home.