To Refinance my Car and pay off my Credit cards or not to?[ Edited ]
Our revolving credit is too high and is hurting our credit. We've never been late on payments or anything. We just had a few unexpected dilemmas that forced us to use our credit, and now we have used up most of it, which is really hurting our credit score. We currently have the option to take out 10K of the equity on our truck to pay it all off (and CUT up the cards!!) and roll it into one payment. However, our rate will go from 3.9% to 8% without extending our current loan term. I absolutely know we'll have the ability to pay it off early, but I don't know if this is the smartest decision.
My husband will deploy in December, which will bring in an addtiontional $1,000/month, plus he'll go up to an 03, which will be another $1,000/ month starting in March or April. ALL of which can go to these payments, if not more since while he's deployed, I will be moving in with family.
Note: I'm all for this idea, and my husband is absolutely against it.
Thank you for giving me the opportunity to weigh in on this. It's always interesting to step into a marital disagreement on a financial topic (as I'm sure you can imagine this happens a lot!). I'm always happy to try to help out.
Longer Term and Higher Rate?
Having said that, I hope my next comment here doesn't cause you to stop reading the rest of my response. Specifically, based on the information you provided here, I think I'm more in your husband's camp than yours on this. Even so, please know this - I really don't think there is a "right" answer for which way to go to here. Since we're dealing with real life variables that are often completely unpredictable, there's just no way to know for sure in advance which will work out better.
Still reading? Good. Now let's talk about why I favor your husband's approach of leaving things as they are (sort of).
My biggest concern with rolling your credit cards into your truck loan is that doing so will cause your truck to get tangled up with this consumer debt. If (and I know the possibility may be remote) some other unexpected dilemmas should arise that leave you struggling to pay all of your bills, you could be putting your means of transportation at risk under your plan. However, keeping the two separated makes that less likely. Also, it's been my experience that credit card debt generally comes with much more emotional pain attached to it than a loan on a vehicle does. Why is that important? Because making this pain go away is often a very powerful motivator; often much more so for a credit card than an auto loan. Now, having said all of this, I'm pretty sure I understand your thinking as well. Paying 8% interest on a new loan is probably a lot less than what you are paying on your credit cards, correct? If so, I realize that keeping things as they are will end up costing you more money than your desired approach, but I think it may be worth it in the end.
A Different Approach
As a possible hybrid approach between you and your husband's thinking, here are my thoughts on what to do:
- Keep things as they are (for now) except try to find a way to slice off some money each month to rebuild your emergency fund. To give yourself the best odds of not falling even further into debt, you're going to need some money in the bank in the form of an emergency fund. Generally we recommend having 3-6 months of your committed expenses in such an account. Since you are trying to work yourself out of a hole, I would probably shoot for the lower end of this range.
- Once your husband starts his deployment, use that extra money to finish shoring up your emergency fund and then begin attacking your credit cards.
- Finally, once his pay goes up from his promotion, or if moving in with family frees up extra cash for you, really hit the gas on the credit card balance reduction and get them paid off. On that note, there's no reason to wait to get rid of your credit cards. You might want to keep just one and bust out the scissors on the others sooner rather than later. You don't need to wait until they are paid off to remove them from your life.
Assuming all goes according to plan, by this time next year your credit card debt will be all gone, you will have money in the bank, and your truck will be that much closer to being all yours.
Thanks again for the opportunity to share my thoughts on this. I hope they are helpful and I wish you both all the best! Finally, thank you both for service and sacrifice for our country - it's greatly appreciated.