If you’ve discovered that you incurred a great deal of nondeductible interest in the past year, it’s time to take action now – well before tax time rolls around again. Paying interest on credit card debt is a financial disaster. You’re likely paying 15%, 18% or more-without even getting any deductions.
Therefore, before you do anything else, pay down your credit card debt. Use money you have sitting in the bank; when you pay down credit card debt that’s costing you 18%, for example, you’re essentially earning 18% on that money, aftertax, with no risk. That’s better than the return on any bank account.
Another option is to refinance credit card debt with housing-related debt, including the interest on up to $100,000 worth of home equity debt. Such interest is deductible, no matter how you spend the proceeds, as long as the credit line is secured by a first or second home.
