Credit Cards, Refinancing and Bankruptcy

Often I hear offers of refinancing your house in order to pay off credit cards. While this seems to be a good idea since it reduces the interest that you pay, it is insane to do this UNLESS you control your credit card spending. There are two reasons why this is so crazy. First, once you pay off the credit cards you are then free to load them up again and therefore end up in a worse position than before. You would be better off paying the additional interest to prevent you from spending more. The second reason is far more important. You take an unsecured debt from the credit card and turn it into a secured debt with your house. This is putting your house at risk. While I do not like the way that bankruptcy is dealt with since people can spend a lot of money and keep the items, if you have to file bankruptcy you can get rid of the credit card debt, whereas I think your home loan, since it is secured, will remain. If you fail to pay your credit card debt, you will harm your credit rating. But if you fail to pay your home loan the bank can forclose and you might lose your home.

Refinancing is going after the symptom, rather than the problem. In order to solve the problem you need to deal with that. If you can not use your credit cards in a reasonable manner, then you should lock them up in a safe deposit box where you don't have easy access. There are times where you might have to purchase something where you can not pay it off that month, but this should be a rare thing. If you don't have enough money saved in the bank to cover emergencies, then you need to work on that. While some might claim that this is easy to say, but hard to do, it is a matter of looking at the spending to see what is needed and what is not. There are many things which are not really needed, yet many people claim they are. Going out to eat typically costs more than fixing the food yourself, so this is an area in which money can be saved.

One interesting thing about credit card debt is that you end up paying so much interest, which takes money away from things that you could spend it on. Get rid of the debt and actually have the money to do what you want, within reason. If you save money in advance, rather than pay for it afterwards, you will have more money to spend on yourself instead of making the credit card companies rich.

Personally I think that the bankruptcy laws should change. I don't think that people who fail to pay their debts should be able to keep all their luxuries. If I was in charge I would change the proceedure so that if you filed bankruptcy all of your recent purchases would be reviewed and any luxuries would be seized and sold to pay your debt.