$1 Trillion in Credit Card Debt is Weighing on Americans – Should You Use Home Equity to Consolidate?
High Credit Card Rates Are Crushing Consumers
With credit card interest rates soaring between 25% and 30%, many Americans are struggling to get ahead of their debt. The challenge? Compounding interest makes it nearly impossible to pay down balances.
For homeowners with equity in their property, a cash-out refinance could provide a way to lower monthly payments and consolidate high-interest debt. But is it the right move? Let’s explore the pros and cons of using home equity to manage credit card debt.
How a Cash-Out Refinance Can Help Consolidate Credit Card Debt
Many homeowners choose a cash-out refinance to pay off credit card debt for two main reasons:
✅ Lower Interest Rates: Mortgage rates, even after recent increases, are far lower than most credit card APRs.
✅ Smaller Monthly Payments: By stretching repayment over a longer period, a cash-out refinance can drastically reduce monthly payments.
The True Cost of Credit Card Debt
According to the Federal Reserve, the average credit card interest rate hit 21.19% in 2023—the highest since tracking began in 1994. For borrowers with missed payments or lower credit scores, rates can climb above 30%.
Meanwhile, credit card balances nationwide have surged past $1.08 trillion (New York Fed, Q3 2023). With both high balances and sky-high interest rates, it’s no surprise that homeowners are looking for better ways to manage debt.
How Much Is High-Interest Credit Card Debt Costing You?
Credit cards are unsecured debt, which means lenders charge higher interest rates to compensate for risk. Paying only the minimum balance can lead to long-term financial struggles.
Example: Cost of Carrying a $30,000 Credit Card Balance
Interest Rate: 25%
Annual Interest Paid: $7,500
Monthly Interest Cost: $625
📌 If you only make the minimum payment (3%) of $900 per month, it would take 58 months (nearly five years) to pay off the balance, with $21,750 in interest costs.
If you continue making only minimum payments, debt can stretch indefinitely, compounding every step of the way.
How Much Could You Save with a Cash-Out Refinance?
Mortgage rates are still much lower than credit card APRs, with cash-out refinance rates currently around 6-7%.
Example: Refinancing $30,000 in Credit Card Debt
If you took out a 30-year mortgage at 6% interest, your new monthly payment for that $30,000 in debt would drop to $180 per month instead of $900.
Even on a 15-year cash-out refinance, you’d pay around $250 per month—significantly lower than a credit card payment.
What about total interest paid?
Paying off credit cards in 5 years (minimum payments): $21,750 in interest
Refinancing into a 15-year mortgage at 6%: $15,570 in interest
Refinancing into a 30-year mortgage at 6%: $34,750 in interest
While extending debt over a longer term increases total interest paid, the lower monthly payments may provide breathing room for homeowners struggling with cash flow.
Refinancing Both Mortgage & Credit Card Debt – A Smart Move?
For homeowners who purchased or refinanced at higher mortgage rates, refinancing both their mortgage and credit card debt could unlock significant savings.
Example: Borrower Refinancing at a Lower Mortgage Rate
Current Mortgage: $160,000 at 7.5% interest
Remaining Balance: $150,000
Credit Card Debt: $30,000 at 25% interest
Refinanced Mortgage: $180,000 at 6% interest
Current Payments:
Mortgage Payment: $1,120
Credit Card Payment (3% minimum): $900
Total: $2,020 per month
📉 New Refinanced Payment: $1,080 per month
By rolling credit card debt into a new mortgage at a lower rate, monthly payments could drop by nearly 50%.
Key Risks of Using a Cash-Out Refinance to Pay Credit Cards
While using home equity to consolidate debt has advantages, it’s not a one-size-fits-all solution. Consider these potential risks before making a decision.
1. You’re Converting Unsecured Debt into Secured Debt
Credit card debt is unsecured, meaning creditors can’t take your home if you default. By refinancing into a mortgage, your home becomes collateral. If you miss payments, you could risk foreclosure.
2. You Might End Up in More Credit Card Debt
If overspending led to high credit card balances in the first place, consolidating into a mortgage won’t solve the root problem. Many homeowners who consolidate end up running up new debt—leaving them in an even worse financial position.
3. Closing Costs Can Add Up
Mortgage refinances come with closing costs, typically 2-4% of the loan amount. If you’re only refinancing a small amount of credit card debt, the fees may outweigh the benefits.
📌 Example: If you refinance $30,000 in debt into a new $250,000 mortgage at 3% closing costs, you’ll pay $7,500 in fees.
Alternatives to a Cash-Out Refinance
If a full refinance isn’t the best fit, there are other ways to consolidate high-interest debt while keeping a low-rate mortgage intact.
✅ Home Equity Loan (Second Mortgage): Borrow a lump sum at a lower interest rate than credit cards, without changing your current mortgage.
✅ HELOC (Home Equity Line of Credit): A flexible line of credit that lets you borrow only what you need, often with lower upfront costs.
✅ Balance Transfer Credit Card: Some banks offer 0% intro APR balance transfers, letting you pay off debt interest-free for a set period.
✅ Personal Loan: A fixed-rate unsecured loan may offer a lower interest rate than credit cards without risking your home.
Final Thoughts – Is Refinancing to Pay Off Credit Cards Worth It?
Refinancing credit card debt into your mortgage can be a smart move—but only for the right borrower. It works best for those who:
✔️ Have substantial home equity
✔️ Need lower monthly payments to improve cash flow
✔️ Can commit to responsible financial habits
However, if you’re concerned about risking your home or paying high closing costs, exploring second mortgage options or alternative debt consolidation methods may be a better approach.
Before making a decision, consult a mortgage professional to understand how a cash-out refinance could impact your finances in the long term.
For more home finance insights, visit Security National Research Center (SNRC).
