Here's an Affordable Trick for Paying Off Your Credit Card Balance
by Maurie Backman | Published on Aug. 17, 2021
Sitting on credit card debt? This is one solution worth looking at.
Sometimes, even the most responsible spenders wind up with credit card debt hanging over their heads. This especially applies these days since a lot of people encountered unplanned expenses or saw their income take a hit during the pandemic.
If you have a nagging credit card balance that you just can't seem to shed, and it's costing you a lot of money in interest, you have some options for paying it off. You could do a balance transfer and move that balance over to a new card with a lower interest rate. Or you could take out a personal loan, use it to pay off your credit cards, and then pay back that loan at a lower rate.
But if you own a home, there's another option worth considering -- a cash-out refinance.
How your home could help you shed unhealthy debt
When you refinance a mortgage, you replace your existing home loan with a new one that has more favorable terms. Generally, that means getting a mortgage with a lower interest rate, as that can also lower your monthly payments.
Many homeowners do a standard refinance, where they take out a new loan equal to their existing mortgage balance. But there's also the option to do a cash-out refinance, which allows you to borrow more than what you owe on your current mortgage. And that move could be your ticket to getting rid of credit card debt.
Say you own a home that's worth $300,000, and you owe $220,000 on your mortgage. Let's also assume you have $15,000 in credit card debt.
With a cash-out refinance, you'd swap your current home loan for a new one in the amount of $235,000. The first $220,000 would be used to pay off your current loan, and the remaining $15,000 could then be used to pay off your credit card balance. You'd then simply pay off your larger home loan with a single payment each month.
Now to be clear, when you do a cash-out refinance to pay off a credit card balance, you swap one type of debt for another. But because refinance rates are so competitive these days, you can reap a world of savings if you go this route.
Imagine your credit cards are charging you an average interest rate of 18% on that $15,000 balance. The average refinance rate as of this writing for a 30-year fixed mortgage is 3.257%. And you're much better off paying down that debt at a little over 3% interest than 18%.
Use your home to your advantage
The longer you carry a credit card balance, the more interest you're apt to accrue, and the more you'll risk damaging your credit score. If you have the option to do a cash-out refinance, it pays to look into it if you're sitting on credit card debt.
Not only might a cash-out refinance be your solution to making that debt more affordable to pay off, but it could also lower your housing costs. And that, in turn, could free up enough money so that you're less likely to have to fall back on your credit cards again.
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