How to Manage Credit Debt with a Cash-Out Refinance

The path to financial security can often feel like an uphill battle, especially for those who have dedicated their lives to serving our country. As living costs continue to rise and economic uncertainty persists, many people are struggling to manage their financial responsibilities. Credit card debt, in particular, can quickly get out of hand if not addressed early. But how can you eliminate credit card debt? Let’s examine how cash-out refinances can help homeowners overcome this obstacle.

Credit Card Usage in America

In the United States, it's well known that people commonly use credit cards. In fact, many adults, including service members, turn to credit cards for everyday expenses, larger purchases, and emergencies.

According to the Federal Reserve, 82% of Americans had at least one credit card in 2023, with the average person managing about 3.9 cards. ^1,2 But sadly, many cardholders are also in debt, often without a clear plan to pay it off.

Statistics on Credit Card Debt in the United States

By the second quarter of 2024, credit card debt in the U.S. surpassed $1.14 trillion, with the average cardholder owing approximately $6,501.^3,4 Interestingly, the generation that has consistently held the highest levels of credit card debt in recent years is Gen X.

Here's a brief overview of the average credit card balances by generation in 2023:

• Generation Z (born 1997-2012): $3,262
• Millennials (born 1981-1996): $6,521
• Generation X (born 1965-1980): $9,123
• Baby Boomers (born 1946-1964): $6,642
• Silent Generation (born 1928-1945): $3,412

What Increases Credit Card Balances?

Rising costs have only compounded the issue of debt management. In fact, a recent survey highlighted that 58% of individuals saw their monthly expenses climb significantly, affecting their ability to pay down credit card debt.⁴

Key expenses contributing to this increase include electricity, auto insurance, gas/heating, home insurance, and rent or mortgage. These financial pressures are also felt deeply by military families, in particular, who often juggle unique expenses and the uncertainties of deployments.

Obstacles to Paying Off Debt

As essential expenses continue to increase, many individuals are becoming more reliant on credit cards. Alarmingly, most people are not confident they can pay off this debt within a year.⁵ The major challenges associated include:

• Rising Costs: 50%
• High Interest Rates: 43%
• Lack of Emergency Funds: 32%
• A Large Necessary Expense: 32%
• Inability to Cover Basic Necessities: 26%
• Job Instability: 21%

The Burden of High Interest Rates

As mentioned above, high credit card interest rates make it increasingly challenging to pay off debt. Therefore, a significant portion of your payments often goes toward interest rather than reducing the principal balance.

Additionally, the mental burden of carrying debt should not be overlooked, as it can significantly impact your mental well-being. Individuals may experience negative effects like trouble sleeping, increased anxiety, social withdrawal, and even depression as a result of their financial situation.⁶

Cash-Out Refinance: A Beacon of Hope

For homeowners, cash-out refinancing offers a strategic way to alleviate high-interest debt. This approach involves refinancing your mortgage for more than you owe, allowing you to use the difference to pay off credit card debt.

The key advantage here is that mortgage rates are generally much lower than credit card interest rates. Specifically, as of July 2024, the average 30-year fixed mortgage rate was 6.73%, which is roughly 20% lower than the average credit card interest rate.⁷ Therefore, if you get a cash-out refinance, you won’t be wasting your time paying excessive interest.

And better yet, the recent interest rate cuts by the Federal Reserve make now an even more attractive time to think about a cash-out refinance.⁸

Cash-Out Refinancing for Debt Relief with Armed Forces Bank

At Armed Forces Bank, our mission is to support and empower those who serve. We recognize the sacrifices made by our military families, and we're committed to being your financial ally.

If you are considering cash-out refinancing* as a solution to ease your debt, our knowledgeable and compassionate lending team is here to assist you every step of the way. Together, let's explore how tapping into your home equity can pave the way to a debt-free future.