This is a scenario I recently reviewed with one of my existing clients – he has accumulated a lot of credit card debt and feels overwhelmed by its significance. He owes $1.2MM on his mortgage at a 30 year fixed rate of 4.925% and the value of his home is $1.85MM. He does not want to give up the interest rate on his 1st mortgage by doing a cash out refinance, considering where current market rates are at, but he reached out since he is struggling with his revolving debt.
I asked him to break down his credit cards by interest rate, current balance, and minimum monthly payment due. He did so and came back with this spreadsheet:
| Credit Card | Balance | Monthly Payment | APR |
|---|---|---|---|
| Chase Freedom | $4,826.40 | $201.00 | 17.99% |
| BofA | $2,175.00 | $25.00 | 0% |
| Chase Hyatt | $3,679.51 | $120.00 | 21.24% |
| Chase Marriott | $26,997.86 | $800.00 | 25.24% |
| Barclays AARP | $4,503.38 | $127.92 | 21.49% |
| Chase Southwest | $15,677.17 | $500.00 | 25.24% |
| Chase Ritz | $33,497.70 | $800.00 | 21.24% |
| Barclays Arrival | $23,770.95 | $659.08 | 21.24% |
| Citi Preferred | $1,119.00 | $41.00 | 0% |
| Apple Card | $9,691.48 | $400.00 | 27.24% |
| Amazon Store Card | $1,368.66 | $29.00 | 29.99% |
| Chase United | $18,139.21 | $495.00 | 21.24% |
| Chase Disney | $6,296.77 | $194.32 | 20.49% |
| TOTAL CC DEBT | $151,743.09 | $4,392.32 |
He has $151,743 in credit card debt and $4392.32 in minimum monthly payments due. Even though the balances are small on the 0% interest rate cards, and I’m unsure when they are set to increase, I omitted them from my analysis, leaving him with $149,449 in debt to pay off. Rounded up, I recommended a $150k 2nd mortgage.
His options are to secure a Home Equity Line of Credit (HELOC) or a 30 Year Fixed Home Equity Loan (HELOAN). He does have other shorter-term options in fixed rate 2nd mortgages, but the 30 year is most helpful for cash flow, in case it’s needed in any given month. Also, keep in mind that his credit score isn’t the best since he’s maxed out on nearly all of this credit cards, and the balance to limit ratio makes up 30% of one’s credit score. He has a 668 credit score; if it were higher, interest rates would be more attractive.
The HELOC actually does not make as much sense for him due to the lower credit score – its interest rate and disadvantages compared to the HELOAN do not warrant any benefit. So I presented him with the 30 Year Fixed HELOAN option, which is a fixed rate 2nd mortgage; the rate and payment will not fluctuate throughout the life of the loan (unlike a HELOC). The current interest rate for his scenario is 12.25%, and the mortgage payment at a $150k loan amount is $1571.85. So right off the bat, he will save $2754.47 each month, and part of that payment pays down on principal.
But here’s an even bigger benefit to consolidating his credit card debt under a fixed rate 2nd: Since he’s actually making timely payments on his credit cards each month, he is managing and can “afford” this total obligation. So if he puts that $2754 towards principal on the new loan each month, he will actually pay the entire $150k 30 year loan off in 3 years and 7 months. The interest savings alone is significant! If you would like me to provide analysis for your situation and to consolidate any credit card debt you have accumulated, I am happy to help.
