Question: I’m carrying about $12,000 on nine credit and store cards, and the interest rates are killing me. I already rolled over the balances a couple times to low-interest and zero-interest cards, but I blew through the introductory offers. But I own my condo, and if I refinance it, I can probably cover what I owe. Should I refinance my mortgage?
— Debby in New Jersey
Tendayi Kapfidze answers…
There are several things to consider. Let’s start with the easiest and proceed from there.
On the surface, this is a simple question to answer. Interest rates on a home refinance are much lower than those on credit cards — around 5 or 6 percent versus 16 or 17 percent average for credit cards. So taking a cash-out refinance to pay off the credit cards would certainly lower your interest costs. Another alternative would be to get a personal loan, which has rates from 7 percent and up. That’s higher than the mortgage, but it could still be lower than the credit card rate, depending on your credit profile.
A particular concern, Debbie, is that you said you “blew through the introductory offers.” So you have already attempted to lower your interest cost, which was smart. However, for this strategy to be most effective, it’s important to not add new debt, but instead, work toward paying off the debt. With nine cards in total, it may be that you have been rolling over balances to new cards and then building up more debt on both the new and old cards. Hence, you are not making progress on lowering debt.
Nine accounts is a lot to juggle, and you could benefit from a tool like myLendingTree, which uses algorithms to suggest debt consolidation strategies. This could help you find the best options for your particular personal financial situation. There is also a wealth of educational material that will help you improve your credit score and debt management.
Just to confirm my information, I asked my friend Matt Schulz about your situation. Matt is chief industry analyst at CompareCards.
“Plain and simple, you need to pay that card debt down,” he says. That’s because credit card APRs are as high as they’ve ever been, and they’re just going to go higher. “Zero-interest balance transfer cards are a great way to help knock that interest down, and even if you blow through the introductory periods and don’t pay the balance off in full, you’ve likely still saved yourself a fair amount of interest.”
Matt is also wary about refinancing your home, but he can see a scenario where it works.
“When you have $12,000 in debt, sometimes you need to make a big change,” he says. “If you do all the math and find that refinancing your home will free up a ton of money that you can use to pay down your credit card debt, then it’s certainly worth considering. A personal loan might be useful as well. Just make sure that you do your homework and know exactly what you’re getting into with either of these options and that you understand all the fees and costs that come along with them. The last thing you want to do is make things worse on yourself because you made a rushed and uninformed choice.”
For further information read Debt.com’s education section on “Should I Refinance my My Mortgage?”
Tendayi Kapfidze is chief economist for LendingTree.