Thinking of refinancing your home to pay off credit card debt? 'Don't do it!' says Dave Ramsey

Many feel the pinch of consumer debt crisis

For context, Courtney, the divorced mum from Baltimore, had made some smart financial decisions. She works as a public health researcher and earns about US$101,000 as an annual salary. She bought her home, years ago, and she's watched it increase in value. It's currently worth USD$430,000, according to a recent appraisal.

Her early entry into the housing market and her high-income gives this divorcee an edge over many North Americans. For instance, by the end of 2023, the median earnings for a worker in Canada was around CDN$55,000 to CDN$60,000 per year, according to data from LinkedIn. However, like most people, the ongoing rise in the cost of living helped this Baltimore homeowner — and many others across North America — to take on debt. A recent poll by Leger states that 47% of Canadians are currently living paycheque to paycheque.

It's how Courtney found herself owing more than USD$60,000 in credit card debt (on various credit cards). In Canada, the average credit card balance is $4,265, according to TransUnion.

Considering the equity built up in her home, Courtney is tempted to sign up for a cash-out refinance to pay off her massive credit card debt. However, Ramsey said this wouldn't improve the situation. “You’re solving a short-term problem with a long-term solution,” he told her.

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Cheaper debt isn't always a good long-term solution

Many finance experts suggest to borrowers to find cheaper ways to borrow money — since reducing the cost to borrow means paying less interest and frees up more money to repay the debt. But for Courtney, refinancing her home's mortgage — to get access to cash to repay her expensive credit card debt — would impact her home loan rates and terms. As Ramsey pointed out, if Courtney were to refinance, it would add stress to her budget since it would prompt an increase in her housing costs. Ramsey pointed out other problems. For instance, if Courtney were to refinance she would lose access to a top-tier lender because of her credit score had dropped in recent months. This would result in higher loan rates, more penalties and tighter mortgage terms.

Instead of refinancing, Ramsey and Delony encouraged her to steadily save up part of her monthly paycheque — and to use these savings to pay down the credit cards over time.

“You’ve treated this credit card debt like it’s cute,” Ramsey told her. “You said the only reason you’re not running up more debt is because they won’t let you, not because you got yourself under control.”

Shifting this pattern of spending could steadily reduce Courtney’s outstanding balance. Assuming she continues to earn more than USD$100,000 a year. Using bit of napkin-math, Delony estimates she could eliminate the USD$60,000 credit card balance within two years.

To get there, she needs a “beans and rice” budget that is focused exclusively on the essentials.

4 actions to take for anyone struggling to pay off their credit card balance

Consider a consolidation loan

A consolidation loan is a loan that rolls a variety of more expensive debts into one, overall debt with a lower interest rate. The benefit of a consolidation loan is that you are paying down the debt, but the cost of carrying the debt is less. Debt consolidation loans are available in a variety of forms and the interest rate charged depends on the terms you negotiate, along with your financial situation and credit score. To find out more — and learn about good options — read the Money.ca guide on debt consolidation loans.

Check out lower interest instalment loans

Instalment loans are personal loans that are repaid over a specified period of time. For instance, someone buying a car may opt to finance the purchase using an instalment auto loan — repaying the same amount each month over the next five years. For more on instalment loans, read the Money.ca guide on instalment loans available in Canada.

Consider transferring to a lower-interest credit card

If your credit card charges 19% or more in interest, you could reduce the cost of carrying a balance on your card and pay off your debt faster, by transferring the balance owed to a low-interest credit card.

For instance, if you transferred a balance of $5,000 from a card that charges 29.99% interest to a low-interest card that charges 12.99% interest, you could pay off your debt 20 months faster and reduce your minimum payment by almost $70 per month.

Check out the Money.ca guide to low-interest credit cards available in Canada.

Trim your budget

When trying to pay down debt, it's a good idea to review your budget to determine areas where you might be able to save a bit (and use those savings to repay the debt). If budgeting isn't your strong suit, consider using budget trackers and apps. A good option is YNAB — an app that lets users learn four simple rules that help significantly decrease their financial stress just from using a budget! According to YNAB, average savings for app users is $600 in the first two months. Try YNAB for free for the first 34 days.

— with files from Romana King

Sources

1. LinkedIn: LLC Insurance: What is the average income in Canada? (October 18, 2023)

1. Leger: Household finances and economic recession (September 1, 2023)

1. TransUnion: Q3 2023 Credit Industry Insights Report (Q3 2023)