Refinancing Credit Card Debt
Many consumers are in the unenviable position of having large balances on their high interest rate credit cards. One of the solutions often suggested for this kind of debt problem is to refinance the debt with a lower interest rate loan of some kind. Examples typically offered for these loans are debt consolidation loans, a home equity line of credit (HELOC) and a cash-out home refinance. While loans like these seem like a good answer (assuming a lower interest rate), there is a serious problem related to each of these that essentially disqualifies them as worthy solutions. Consumers should explore other options to consolidate their debt, such as enrolling in a debt management plan through a credit counseling agency.
This is because debt consolidation loans simply don’t exist anymore in the current lending environment. Cautious lenders now consider this kind of loan to be too risky for their portfolios. Assuming that there is sufficient equity remaining in the home to have enough credit available (a questionable assumption these days) to pay off the credit card debt, there is a big problem here in exchanging unsecured debt for secured debt. Missing credit card payments can ruin your credit, but missing HELOC payments can jeopardize your home. The same issue makes a cash-out refinance very risky, unless of course the new payment is still comfortable for the borrower due to a lower interest rate on the new loan. In any case, even “normal” refinances are difficult for the consumer to qualify for in the present state of the economy.
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