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Credit cards and home loans

I have about $10,000 in credit card debt and I also have a home loan. The credit card debt is at 17 per cent while my home loan is 6.75 per cent and I was wondering if I should pay off my credit card debt by, say, getting a renovation loan but just add in a bit to KO the credit card debt. What do you think? I have heard some money experts warn against rolling credit card debt into a home loan.

As with most money questions, there’s never a simple answer as our circumstances differ so much — our age, our income, our income potential, our goals, our expenses, etc. The people who warn against this play say you’re taking short-term credit card debt and making it a 20 to 25-year debt. Over that time, despite the lower interest rates, you will pay more interest and that’s why some experts warn against it.

However, if you had cash flow problems now, say, because you have a young child at home and only one parent is working, then it could be wise for cash purposes to kill the credit card debt and have smaller monthly total debt repayments. First, I would advise that you cut up the credit card and maybe use a debit card or cash until your income grows to support a credit card that you can pay off.

With respect to a renovation loan where you add in an extra amount, this can work provided you don’t put yourself into a dangerous repayment situation if interest rates go a lot higher. Make sure you could cope if interest rates went to nine or ten per cent over the next three years. What I’m advising everyone to do is to try some cash flow forecasting where you match your expected income with expected expenses — interest rates, school fees for kids, holidays, etc. — and make sure you’re running a money-smart life.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


Published on: Monday, May 17, 2010

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