Americans shifting debt from credit cards to home equity.

It is possible to pay 18-25% interest to a bank on your evolving credit balances, or you could apply to the same bank for a home equity loan and pay 6-9% for the same money. That could save you many thousands of dollars, and Americans seem to be figuring that out.

Total consumer debt has been rising for the past five years. At the end of 2005, Americans were paying 13.86% of “disposable personal income” for debt payments of all kinds, compared to only 12.77% five years ago.

The share of debt going to credit cards has recently started to drop, however. Credit card debt accounted for only 5.71% of all homeowner debt at the end of 2005, which is the lowest percentage in a decade. (Five years ago, that number was 6.4%.)

So it is clear that consumers, perhaps driven by ever increasing interest rates at credit card companies, are getting much more sophisticated about their debt. This is a good trend.

Credit card company interest rates, which are not subject to local usury laws if the company has incorporated in Delaware (or one or two other states with no usury laws) are essentially unlimited.

I have seen rates as high as 35%! At that rate, if you owe $10,000, and paid $300 a month, nearly all of your payments would go to interest. At a 10% intrest rate, more than two-thirds of the money would go to pay down principal.

Read my section on Managing Credit Cards to learn more.

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