It can be a good strategy to refinance your high-interest debt, but there are behavioural risks involved.

Question

I accrued R80,000 of credit card debt during a difficult period. Things are now more stable, but the debt is expensive at 20.6% interest. I have available credit in my access bond, where the rate is 9.75% and only six years remain. Would it make sense to use the bond to pay off the credit card, or would that simply stretch the debt out for longer?

Answer

Not all debt is the same. A home loan and a credit card may both be debt, but they do not damage your finances in the same way. The key difference is what they cost you.

In your case, the numbers make the starting point fairly clear. Your credit card is charging 20.6% interest. Your access bond is charging 9.75%. This means the credit card debt is costing you far more every month, and replacing that expensive debt with cheaper debt is, at least mathematically, a sensible move.

On R80,000, the interest rate gap is significant. At the starting balance, the difference is roughly R8,680 a year, or about R723 a month. So this is not a tiny saving. It is meaningful. If you use the access bond to clear the card,...