Should I consolidate my debt?[ Edited ]
HI JJ, Is it wise to take out a home equity or to refinance our home mortgage to pay off credit cards (some with 13% interest)? We currently have about $33,000 in credit card and personal loans and house currently have 20% equity (roughly $100,000). Thank you for your time. Financial Freedom Newbie
I'll start by saying that experience can be a great teacher. Early in my career and faced with the question you've asked I can still vividly recall crunching the numbers and cavalierly recommending that my client use a home equity loan to consolidate roughly the same amount of debt you have. It didn't work out well.
In fact, several months later when we met to review things they had successfully consolidated their debt into a single low-interest rate home equity loan with a single payment and a definite end date. Good. However the problem was this move left them with a number of zero balance credit cards and guess what...they fixed that! Not so good. So, there they sat with a home equity loan and a whole bunch of new credit card debt. That's not an outcome you (or I) want.
With that in mind, I think its critical to address how you got to the point where you ended up with $33,000 in credit card debt--before making any move to consolidate your debt. If you honestly examine your situation and see that you've habitually spent more than you've earned and that's resulted in the credit card debt that's got to be fixed. And that means diving into the tough work of building and living within a budget. Create a spending plan in which you spend less than you earn and even start saving a little cash cushion (say $1,000) so you don't have to turn to credit if something unexpected pops up. There are financial readiness counselors on military installations that can help you with this work or check with the folks at the National Foundation for Credit Counseling www.nfcc.org). If or when you've got this under control, then consolidation can help you knock out your debt and pay less in interest charges.
When you evaluate your consolidation options, you should definitely consider interest rates and costs and shop around. In my experience, home equity loans (not lines of credit) have provided a low cost way to get a competitive interest rate and to give you a definite timeline to be done with your debt. Although in today's environment, lenders are not as cavalier with those loans as they were back when my client took that leap (experience again!). It may be more difficult to find a lender that will allow you to tap into the equity you do have. When you're ready, give one of our advisors a call at 800-771-9960 and they can help you explore USAA options on this front.