Updated: Feb 23, 2022
So often in life, we get so caught up in the day-to-day trying to keep up with bills and expenses that we often lose sight of our finances. Before you know it, the credit cards are maxed out and you find yourself robbing Peter to pay Paul every month. This seems to be the case with so many Americans that got laid off during the COVID shutdown in 2020. It is still a good time to refinance and pay off that pesky debt that somehow just won’t go away. Utilizing the equity in your home as a way to eliminate debt is a good strategy to get back on track financially.
I know it can often be a lot to swallow to use up hard-earned equity to pay off mounting credit card debt. But, if you consider the bigger picture of paying 20-24% interest on a credit card over 20 years vs. 4.0% on a mortgage over 30 years, the savings is significant. Better yet, If you consider putting that same amount of savings towards the principal balance every month, you can pay down your mortgage much faster than if you continue to struggle to just pay the minimum on your credit cards every month. For example, say you have a $15,000 credit card balance at 20% interest and the minimum payment is $475/mo. By taking a cash-out and paying off the card, you are freeing up $475/mo in expendable monthly cash. If you put it towards the principal balance of your mortgage instead, that $15,000 that you added to your mortgage balance gets paid off in less than 3 years vs. 25 years if you continued to pay the minimum amount on the credit card.
I don’t recommend this strategy if you only have a small number of credit cards with small balances. But, if you have a large number of cards with maxed-out balances and they are affecting your credit rating, I highly recommend considering utilizing the equity in your home to cash out and pay them off. The key here is to not run the balances back up again. It will only land you back where you started and more difficult to dig out again.
To maintain a good credit rating after the credit cards have been paid off, do not close out those credit cards. Oftentimes, canceling credit cards that have a long history, will drop a credit score because the long-time history goes away. If the cards are newer, opened within the last 12 months, and you don’t feel comfortable leaving them open, go ahead and close them.
In addition to paying off or down credit balances, it is beneficial to continue to use these cards that have a history, in small amounts. For instance, charge a tank of gas or groceries, let it cycle through the credit reporting period and then pay it off once you receive the bill. Never charge more than 10-20% of the credit limit.
Do not apply for new credit. The inquiry and the new credit card will affect your score negatively. But, instead, keep the cards that you have open and use them in small amounts. Opening new credit will often hurt your credit score temporarily.
Always make your payments on time. Set your accounts up on autopay for the minimum payment and then go in to pay off the balance in addition to the minimum monthly payment. Or, if you use a daily digital calendar, input your payment due dates as a recurring reminder so you never miss a payment. Not only will credit rating with the credit bureaus stay good, but over time, the creditor might be willing to drop the interest rate on the card to keep your business.
If you stay the course and follow a plan, you will continue to see your credit score rise over time. Be patient because it does not happen overnight. If you are not sure how much equity you have to work with, click here to request your FREE Property Valuation Report. Once you are ready to take the next step, book an appointment with COMortgageGal to get started on your path to financial freedom.
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