While you are working to pay off your debt, is it ever a good idea to refinance some — or all — of it to a lower interest rate? Financial gurus seem split on the issue. I say it all depends on your particular situation and your mindset.
My personal experience with consolidation loans wasn’t a positive one. I went to one of those shady finance companies located in a strip mall to consolidate my debt, which included store credit cards, bank credit cards and some minor medical bills. I didn’t realize until later that the reason my payment was lower was because the repayment time was stretched out, not because it was a great interest rate. I had thrown no-interest medical bills into the mix and was now paying more than 20% on them.
When is it the right time to refinance your consumer debt?
Even worse, a year later I had run up the credit cards again. This meant I had the consolidation loan plus the credit card bills. If you are considering a loan like this, be sure to read the fine print and understand the fees and interest rate. Don’t put low or no-interest bills into your consolidation loan. Close out the credit card account and cut up the credit cards, so you don’t end up in the same mess I did.
A home equity line of credit (HELOC) or a second mortgage may appear to be a great way to pay off your credit cards and other consumer loans. Most HELOC’s and second mortgages have nice low rates and the interest is deductible on your tax return. I would advise you, however, to proceed with caution before refinancing your home or taking out a second mortgage for the purposes of debt consolidation. What happens if you lose your income for whatever reason and can’t pay all of the bills? If you don’t pay your credit cards, collectors will scream at you to pay them, but they can’t foreclose on your home. If your mortgage payment suddenly becomes unaffordable because you lost your job, you’re risking your family’s home, not just your credit score.
Balance transfers between credit cards can potentially accelerate the payoff of your debt snowball. Many banks offer six to 12 months of low or no interest as a teaser to switch to their card. It may not always be the right decision, so be sure to look at the fine print. How long is the low or no interest rate in place? What will be the interest rate after that? The second question is probably more important than the first one. How does the new card’s regular rate stack up against what you’re currently paying? How much of the balance will you be paying off during the teaser rate period? Don’t make the mistake of assuming that you’ll be able to jump ship and transfer balances again, because who know if that opportunity will be there when the time comes.
Here’s the bottom line — you can’t borrow your way out of debt.
The only way to become debt free is to pay more than the minimum due on your credit cards and loans month after month, until they are paid in full. If your end-goal is living debt free, refinancing can fast-track your journey If you do it right.
Christine Luken is a writer, financial coach and teacher. A Dave Ramsey Certified Financial Counselor, she is an active member of the Northern Kentucky Chamber of Commerce and a member of BNI (Business Network International.) Luken holds a Bachelors Degree in Accounting, with minors in Business Administration and Psychology. She was vice president of HR & Accounting in the manufacturing sector for 13 years before starting her own company, 7 Pillars, LLC in 2010.
