Question: I have about $45,000 in credit card debt and want to pay off these credit cards with an equity loan on my house. I would also like an additional $10,000 to do some home improvements. I have great credit and a good income but the high interest rates on the credit cards are killing me. Thanks to the appreciation in my house, I have about $100,000 in equity. I have a $300,000 fixed rate mortgage at seven percent so I don't want to touch that. I've shopped around a bit and found two appealing options. The first is a $55,000 seven year fixed rate loan at 6.50 percent. The second option is a home equity line of credit up to $55,000 at prime rate, currently at 4.75 percent. Don't you think I should take the fixed rate loan instead of the prime rate loan? I would hate for prime to jump up.

Answer: Actually, my first reaction would be to recommend the home equity line of credit (HELOC) at 4.75 percent. But let's dissect your situation.

Your main problem is the high interest credit card debt. Get rid of it. Make it go away and never come back. This means you must pay your credit cards to zero and never, ever carry a balance over 30 days.

This is a function of cash flow. Credit cards are fine to earn airline miles and grocery store credits. But if you don't pay off the balance in full every month, the high interest will kick in and you spend all your hard earned money paying perhaps up to 18 percent. With this kind of interest, it's hard to dig into the principal.

Therefore, in order to ensure that your credit cards are paid to zero each month you must have an increase in cash flow. Paying off your credit cards by tapping into the equity in your home is only a temporary solution if you jack up the balances again. Once you pay these cards off, your cash flow must improve to the amount that is sufficient so that you will never carry a balance again.

Now let's talk about your two home equity loan options. Both are good loans. A fixed rate 2nd trust at 6.50 percent is great. The prime rate is at 4.75 percent - also great.

In many situations, I would recommend locking into the fixed rate for seven years. But not in your situation. You need the increased cash flow to ensure that your credit card balances are paid off.

A $55,000 loan at 6.50 percent amortized over seven years gives you a monthly payment of $817 per month. The minimum payment on your $45,000 credit card balance is probably something close to $1,100 per month. Securing the fixed rate loan will improve your cash flow by $283 per month. Is this enough to ensure that you won't carry a credit card balance again?

By contrast, most HELOCs offer interest-only payments for the first ten years, and then you have another 20 years to pay the loan off. The interest only payment on a $55,000 HELOC is only $217 per month. This would increase your cash flow by $883 per month.

It's true that the HELOC can and will increase in rate at some point. But remember that the Prime Rate moves whenever the Federal Reserve decides to move rates. With the Prime Rate currently sitting at 4.75 percent, Fed Chairman Alan Greenspan would have to make seven ¼ point increases for the prime to hit 6.50 percent. He may do this, but it will be over time.

Here's the bottom line: The prime rate will probably average out higher than 6.50 percent over the next seven years, and this technically makes the fixed home equity loan a better deal. But if you need that extra cash flow in order to pay off your credit cards in full every month, the more flexible prime rate HELOC is the better way to go.