Secured Credit Card vs. Home Equity Line of Credit - Tilted Forum Project Discussion Community

Stompy · 08-12-2004, 09:40 AM

There's a lot of "how to build good credit" types of threads around here, so I wasn't sure whether or not to make this an entirely new thread or to just post it in one of those... but anyway.

I have a lack of credit history, or rather, a very short credit history. As I mentioned in another thread, I do own a house and have a small loan ($2k) out from when I re-did my bathroom. Both of which I'm paying on time AND making additional payments toward principal ($120 a month for house, $200 a month toward the bathroom loan). I figured I had good credit until recently when I was turned down for requesting relatively small lines of credit ($1500 max).

It seems, at this point, that my only option is a secured line of credit. A friend of mine mentioned to me that since I have owned my house for 2 years now, I should be able to get a home equity line of credit, which is, as he explained it, pretty much the exact same thing as a secured card with a higher limit and better interest rates. Is this true?

Also, I'd like to understand the pros/cons of doing so.

From reading the past threads, I've gathered that a good way to build credit is to run up 60% of your card's limit and pay it off in full each month (or if you don't pay it off, just make sure you don't exceed 60%). A lot of home equity lines of credit have a $10k minimum... would that same logic apply in this case? To maximize building my credit, I'd have to pretty much find $6,000 of stuff to buy, or is the 60% simply a guideline of what not to exceed?

At this point, is it really just preference, or is there one I should favor over the other for any reasons in particular?

NoSoup · 08-12-2004, 11:12 AM

As far as the 60% rule goes, you don't necessarily need to get the balance up that high, but don't go over it. It doesn't really make too much of a difference if you charge $10 or 40% of the limit, as long as it reports a balance.

In this situation, I would suggest a Home Equity Line of Credit rather than a secured credit card, simply because interest rates are generally lower, and the interest you do pay is generally tax deductible.

Basically, your friend was right, it is very similar to a credit card, but the collateral for the loan is your home.

If you have any more questions or I missed something, just let me know

gar1976 · 08-13-2004, 08:11 AM

Heck, why don't you have a regular credit card? I'm assuming the house was inhereted, otherwise you have a lot of income to buy and pay one off already, which means a nice job, and then they would throw cash at you in an attempt to get you to borrow.

Don't know if I would monkey around with a house line just to build credit, when you can get a plain ol' visa, pay off whatever you bought within a month, and move on. No sense throwing money away on interest/fees if you don't need to.

Stompy · 08-13-2004, 08:38 AM

I can get a mortgage out for a house just fine, but I can't get a card, go figure

The reason why (and I just got a letter explaining this) is because my credit history is too short, but that makes no sense because everyone I know got a plain ol' credit card just fine. I have a house payment AND a home improvement loan that I pay on time and more than what's needed.

The whole credit system is a joke, if you ask me. But anyway..

The HELOC seems to be the best way to go so far as interest rates are between 3% - 7% (from the banks I've called), and they even pay all the fees (appraisal, title, etc..).

I'd much rather pay 7% (hell, I'd rather even pay 9%!) than the standard 16-21% that most credit cards offer.

Stompy · 08-16-2004, 10:21 AM

I'm looking at getting this through Standard Federal (http://www.standardfederalbank.com/l...ome_lines.html)

It says there's no closing costs, no applications fees, nothing, but in the "fine print" section it just explains the APR as being 3.5% to 7.25%. The ONLY thing there that I don't understand is the line about a balloon payment.

Here's the "fine print"

Quote:

The Annual Percentage Rates (APRs) on Standard Federal Bank's Home Equity Lines of Credit are tied to Prime. Prime is the highest Prime Rate as published in the "Money Rates" section of The Wall Street Journal on the last publishing day of the calendar month immediately preceding the billing cycle. The margin tied to Prime varies and depends on the approved credit line amount and product. On 7/30/04, Prime was 4.25% and the APR on Standard Federal Bank's Home Equity Line of Credit products varied between 3.50% and 7.25%. Prime is a variable rate; as it changes, the APR on your account will change. The maximum APR is 21%. A balloon payment will result at the end of the ten-year draw period. The Home Equity Lines are limited to owner-occupied, 1-4 family principal residences and are subject to no less than a second lien position on your property. You must carry insurance on the property that secures this loan. Flood insurance required if necessary. There is a $50 annual fee after the first year unless you are a member of Credit Exclusives. Consult your tax advisor concerning the deductibility of interest. Closing costs paid by Standard Federal Bank are limited to: appraisal, title insurance, flood certification and recording fees. Any additional fees or conditions imposed by the city, state or county that the subject property is located in will be the borrower's responsibility. The APRs are subject to change without notice.

Does that mean it's 3.5% - 7.25% interest PLUS the prime? So in other words, as little as 7.75%, but as much as 12.25%? (I guess either way, it's better than paying the credit card interest rates)

Cynthetiq · 08-16-2004, 10:39 AM

balloon payment.. the total balance left on the loan... usually it's a large principal payment at the back end.

Stompy · 08-16-2004, 10:56 AM

Ah, so if I take out this line of credit, use it for a year or two, completely pay it off, and then close the account, I'll be good and won't incur any additional charges?

The way I see it now, based on what the "fine print" said, there is absolutely NO cost aside from the $50 a year and.. interest.

Does that sound right?

Cynthetiq · 08-16-2004, 11:17 AM

If the HELOC is the same as most people's yes, it's no charge until you draw against it, and then once you've paid it off you are welcome to use it again, at no cost until you use it.

Merlocke · 08-18-2004, 03:06 AM

Weird how you'd get a line of credit sooner than they'd give you a credit card.
It's usually more difficult to get a LOC than a normal CC - go figure.

Honestly - go try another bank/card. You never know.
Personally - if you need the LOC for something large - then by all means - go the LOC route. It is Bigger, and lower interest.

However - if you're doing this just for a cc so you can buy crap from eBay or pay off your bills easier (one central location) - then get a point system card where the money you put in goes towards getting gift certificates at future shop, or what not. Airmiles are starting to pretty much suck these days compared to the other options that are out there now.

Stompy · 08-18-2004, 06:04 AM

How is it more difficult to get a LOC? You have collateral (equity), so isn't it pretty much guaranteed?

After I got declined from Capital One, I got another offer from them (via mail) for a $1000 limit card was 19% APR.

Unless there's something I'm missing, I'd much rather pay a low APR (at this point, it's more than half of what a normal "starter" card is), especially if there's no cost to me to get one. That site flat out said "no costs" and went on to explain (in the paragraph I quoted) the "catches", if any.

The higher limit may pose a threat since I might be tempted to run it up, but I've got a lot more sense than that after seeing many people utterly ruin their lives from these things

I'm just making 100% sure that there isn't any catch that I'm not currently aware of, or in other words, a reason why I SHOULDN'T get it, because that low APR w/ the high limit looks very appealing!

Stompy · 08-18-2004, 09:43 AM

What I don't get is why they still have to do a credit check, and how someone with bad credit could even get turned down: equity is equity.

The HOUSE is collateral, so if you show them "Hey, my house has 25k in equity" which is GUARANTEED payment for them, how and why would they turn you down?

A friend of mine and I went into the bank today to talk w/ a banker, and the banker said, "Since the collateral is your house, you could essentially burn the house down if you didn't want to pay the loan back, which would make it worth nothing". Haha, are they serious? And, uh, how the hell would your credit report determine THAT? So someone w/ bad credit will automatically burn their $150k+ house down to save paying $10,000? (On a side note, surprisingly enough, there weren't any catches. Everything is 100% paid for [appraisal, title fees, etc..] and the interest rate is 7%)

Doesn't seem right to me. Is that alone the reason they pull your credit, or... is there a real reason for it?

Cynthetiq · 08-18-2004, 09:57 AM

because a credit risk is still a credit risk.

banks, like insurance are about risk aversion. they don't want to have to foreclose on the house and take ownership of it that takes money and resources.

and if the person burned down their house to save the payments...would be sought after for arson.

08-12-2004, 09:40 AM	#1 (permalink)
Stompy Banned from being Banned Location: Donkey	Secured Credit Card vs. Home Equity Line of Credit There's a lot of "how to build good credit" types of threads around here, so I wasn't sure whether or not to make this an entirely new thread or to just post it in one of those... but anyway. I have a lack of credit history, or rather, a very short credit history. As I mentioned in another thread, I do own a house and have a small loan ($2k) out from when I re-did my bathroom. Both of which I'm paying on time AND making additional payments toward principal ($120 a month for house, $200 a month toward the bathroom loan). I figured I had good credit until recently when I was turned down for requesting relatively small lines of credit ($1500 max). It seems, at this point, that my only option is a secured line of credit. A friend of mine mentioned to me that since I have owned my house for 2 years now, I should be able to get a home equity line of credit, which is, as he explained it, pretty much the exact same thing as a secured card with a higher limit and better interest rates. Is this true? Also, I'd like to understand the pros/cons of doing so. From reading the past threads, I've gathered that a good way to build credit is to run up 60% of your card's limit and pay it off in full each month (or if you don't pay it off, just make sure you don't exceed 60%). A lot of home equity lines of credit have a $10k minimum... would that same logic apply in this case? To maximize building my credit, I'd have to pretty much find $6,000 of stuff to buy, or is the 60% simply a guideline of what not to exceed? At this point, is it really just preference, or is there one I should favor over the other for any reasons in particular? __________________ I love lamp.

08-12-2004, 11:12 AM	#2 (permalink)
NoSoup Non-Rookie Location: Green Bay, WI	As far as the 60% rule goes, you don't necessarily need to get the balance up that high, but don't go over it. It doesn't really make too much of a difference if you charge $10 or 40% of the limit, as long as it reports a balance. In this situation, I would suggest a Home Equity Line of Credit rather than a secured credit card, simply because interest rates are generally lower, and the interest you do pay is generally tax deductible. Basically, your friend was right, it is very similar to a credit card, but the collateral for the loan is your home. If you have any more questions or I missed something, just let me know __________________ I have an aura of reliability and good judgement. Just in case you were wondering...

08-13-2004, 08:38 AM	#4 (permalink)
Stompy Banned from being Banned Location: Donkey	I can get a mortgage out for a house just fine, but I can't get a card, go figure The reason why (and I just got a letter explaining this) is because my credit history is too short, but that makes no sense because everyone I know got a plain ol' credit card just fine. I have a house payment AND a home improvement loan that I pay on time and more than what's needed. The whole credit system is a joke, if you ask me. But anyway.. The HELOC seems to be the best way to go so far as interest rates are between 3% - 7% (from the banks I've called), and they even pay all the fees (appraisal, title, etc..). I'd much rather pay 7% (hell, I'd rather even pay 9%!) than the standard 16-21% that most credit cards offer. __________________ I love lamp.

08-16-2004, 10:39 AM	#6 (permalink)
Cynthetiq Tilted Cat Head Administrator Location: Manhattan, NY	balloon payment.. the total balance left on the loan... usually it's a large principal payment at the back end. __________________ I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not. What's the best nation in the world? DO-NATION!

08-16-2004, 10:56 AM	#7 (permalink)
Stompy Banned from being Banned Location: Donkey	Ah, so if I take out this line of credit, use it for a year or two, completely pay it off, and then close the account, I'll be good and won't incur any additional charges? The way I see it now, based on what the "fine print" said, there is absolutely NO cost aside from the $50 a year and.. interest. Does that sound right? __________________ I love lamp.

08-13-2004, 08:11 AM	#3 (permalink)
gar1976 Custom User Title Location: Lurking. Under the desk.	Heck, why don't you have a regular credit card? I'm assuming the house was inhereted, otherwise you have a lot of income to buy and pay one off already, which means a nice job, and then they would throw cash at you in an attempt to get you to borrow. Don't know if I would monkey around with a house line just to build credit, when you can get a plain ol' visa, pay off whatever you bought within a month, and move on. No sense throwing money away on interest/fees if you don't need to.

08-16-2004, 11:17 AM	#8 (permalink)
Cynthetiq Tilted Cat Head Administrator Location: Manhattan, NY	If the HELOC is the same as most people's yes, it's no charge until you draw against it, and then once you've paid it off you are welcome to use it again, at no cost until you use it. __________________ I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not. What's the best nation in the world? DO-NATION!

08-18-2004, 03:06 AM	#9 (permalink)
Merlocke Location: Canada	Weird how you'd get a line of credit sooner than they'd give you a credit card. It's usually more difficult to get a LOC than a normal CC - go figure. Honestly - go try another bank/card. You never know. Personally - if you need the LOC for something large - then by all means - go the LOC route. It is Bigger, and lower interest. However - if you're doing this just for a cc so you can buy crap from eBay or pay off your bills easier (one central location) - then get a point system card where the money you put in goes towards getting gift certificates at future shop, or what not. Airmiles are starting to pretty much suck these days compared to the other options that are out there now. __________________ -=[ Merlocke ]=-

08-18-2004, 06:04 AM	#10 (permalink)
Stompy Banned from being Banned Location: Donkey	How is it more difficult to get a LOC? You have collateral (equity), so isn't it pretty much guaranteed? After I got declined from Capital One, I got another offer from them (via mail) for a $1000 limit card was 19% APR. Unless there's something I'm missing, I'd much rather pay a low APR (at this point, it's more than half of what a normal "starter" card is), especially if there's no cost to me to get one. That site flat out said "no costs" and went on to explain (in the paragraph I quoted) the "catches", if any. The higher limit may pose a threat since I might be tempted to run it up, but I've got a lot more sense than that after seeing many people utterly ruin their lives from these things I'm just making 100% sure that there isn't any catch that I'm not currently aware of, or in other words, a reason why I SHOULDN'T get it, because that low APR w/ the high limit looks very appealing! __________________ I love lamp.

08-18-2004, 09:43 AM	#11 (permalink)
Stompy Banned from being Banned Location: Donkey	What I don't get is why they still have to do a credit check, and how someone with bad credit could even get turned down: equity is equity. The HOUSE is collateral, so if you show them "Hey, my house has 25k in equity" which is GUARANTEED payment for them, how and why would they turn you down? A friend of mine and I went into the bank today to talk w/ a banker, and the banker said, "Since the collateral is your house, you could essentially burn the house down if you didn't want to pay the loan back, which would make it worth nothing". Haha, are they serious? And, uh, how the hell would your credit report determine THAT? So someone w/ bad credit will automatically burn their $150k+ house down to save paying $10,000? (On a side note, surprisingly enough, there weren't any catches. Everything is 100% paid for [appraisal, title fees, etc..] and the interest rate is 7%) Doesn't seem right to me. Is that alone the reason they pull your credit, or... is there a real reason for it? __________________ I love lamp.

08-18-2004, 09:57 AM	#12 (permalink)
Cynthetiq Tilted Cat Head Administrator Location: Manhattan, NY	because a credit risk is still a credit risk. banks, like insurance are about risk aversion. they don't want to have to foreclose on the house and take ownership of it that takes money and resources. and if the person burned down their house to save the payments...would be sought after for arson. __________________ I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not. What's the best nation in the world? DO-NATION!