A Suze Orman exclusive

Now that I’ve shown you what to do, I want to make sure you avoid two bonehead moves. Whatever you do, don’t you ever use a Home Equity Line of Credit (HELOC) or a loan from your 401(k) to pay off your credit card debt!

The HELOC move may be popular, but popular doesn’t equal smart. Your credit card debt is what is known as “unsecured.” What that means is that if you default on paying this debt, the credit card issuer can’t take possession of any asset of yours as a way of getting their money. A HELOC, on the other hand, is what is known as a secured loan; there is collateral on the loan so if you default, the lender can indeed grab that collateral as a way to get paid. And guess what? The collateral on a HELOC is your home. If you get behind on that loan—say you lose your job, or become too ill to work—and miss too many payments, the lender has every right to force you to sell the home to pay off the debt. So if you use a HELOC to pay off your credit card debt you are putting your home at risk. And remember that the interest rate on HELOCs are adjustable, not fixed. So if interest rates rise—and we’re in a rising-rate environment right now—you will end up paying higher and higher rates on your HELOC. That’s just another layer of risk you don’t want. So, please, never ever use your home to solve your credit card problems.

Same goes with 401(k) loans. When you contribute to a 401(k) you use money that has not yet been taxed. But if you borrow against your 401(k), you will repay it with after-tax money. Then that money you have used to “repay” your 401(k) loan will be taxed again when you eventually make a withdrawal in retirement. I think being taxed once is plenty.

Besides, 401(k) loans are actually incredibly dangerous. You typically have just five years to repay the loan, but if you decide to leave for a new job—or are fired—you will need to repay the entire loan amount within a few months, or else the unpaid loan balance will be treated as a formal withdrawal from your account and you’ll be hit with income tax on the amount of the withdrawal. Plus, if you are younger than 59 ½ you are also going to get stuck with a 10 percent penalty.