When mortgage rates are low, consolidating debts and rolling higher interest credit card debt into the bargain can seem like a sound financial decision, but a financial expert might not share your enthusiasm.
Dealing with debt
Excessive credit card debt, even with a good credit rating and low interest rates, can be crippling. Many families are facing new budget constraints imposed by unemployment or underemployment – people still at their jobs with reduced hours or forced to take lower paying jobs. With the bills mounting, some families grasp at what they see as the lifesaver bobbing in murky financial waters, their biggest asset; their home. Refinancing can be a good move, but using the money to pay off credit card debt does not always fix the situation, and can ultimately make it far worse.
Can you live without credit cards?
The first thing to consider is whether clearing your current credit card debt will really help. Can you live without credit cards, or would you charge them to the limit again and find yourself in the same situation five years from now, deeper than ever in debt with your equity eroded and interest rates higher? If you found yourself with an aging car and $600 a month reduction in bills, would the temptation of a new car be too seductive? Few people accustomed to living with credit cards can honestly say no and stick to it.
Refinancing Math
The next thing to consider is the reality of mortgage refinancing. Do the math. How much will refinancing drop your interest rates? Considering the fees associated with refinancing, if it's 2 points or more, it's probably worth it, but rolling your credit card balances into the loan will add to your debt while extending the loan, often for years. Financing last year's Christmas presents at 5% for 30 years will cost you far, far more than paying them off in five, even at 9% interest or higher.
Should you cancel your cards?
It's probably a bad idea to cancel your credit cards altogether, because until the economy recovers, new offers won't be rolling in. A better idea is to put them where you can't get to them in a hurry. Instead, put them in a safe deposit box or store them in your freezer – frozen in a container of ice so impulse buys are out of the question.
There's no easy way to dig out of debt. It takes budget control, sacrifice and determination. Before you grab what looks like a lifesaver, consider all the facts and make an informed decision. Your financial future is at stake.