<content>My parents are selling their house to buy another closer to me. They have good equity in their house and are making a profit too. They are thinking of paying off their credit cards ( to the tune of $60,000) and then using what is left as their downpayment on the new house. This will make their mortage payment higher, but they won't be paying the credit cards each month like they do now. They wondered if this was a smart thing to do or should they put as much as possible down on a new house? My friend told them not to close any of their credit cards either, and my friend suggested maybe paying off the cards that are charging the most interest and leaving some owned money on the cards---not to pay them to zero. Maybe someone here can suggest what is best all the way around for them at this time.
The answer to this question depends on a lot of circumstances that are specific to your parents, so no one will be able to give you THE correct answer.
That being said, there are still things to consider:
Suppose your parents owe $100,000 on their current house and $60,000 in credit card debt. Let's assume that's all of their debt - a total of $160,000. Some of that debt is being repaid at a mortgage rate (what that number is depends on when they took out this mortgage), some of that debt is being repaid at credit card rates (again, these differ depending on the cards).
For the sake of argument, let's say that the mortgage rate is 6 percent and the credit card rate is 14 percent. Without doing the math (which would require a whole new set of assumptions about the term of repayment, etc.), I think it's easy to understand that repaying a loan at 6 percent is "cheaper" than repaying a loan at 14 percent. (Remember, the "cost" of a loan is really how much interest you'll pay during the repayment period).
Now suppose they take the same $160,000 debt and refinance it, but now, all of the $160,000 is borrowed at 6.5% interest, rather than some at 6 and some at 14. Again, it should be apparent that the "cost" of paying back the $160,000 is "cheaper" at 6.5 percent than it was at 6 and 14.
(Remember, however, that the sale and purchase of homes are associated with significant closing costs. In my area, closing costs average about 3 percent of the value of the transaction for buyers and maybe 1.5 or 2 percent for sellers. Since your parents are both selling and buying, they'll face closing costs on both transactions, and the sum total of these costs will be a significant amount.)
As for your question about closing credit cards - Credit worthiness (your ability to borrow) is based on your credit history. Banks and other lenders are notoriously reluctant to lend money to people who do not already have credit from other lenders. Part of what goes into their analysis is your ratio between credit available to you, and credit actually being used.
You might think that lenders would prefer to lend money to people who don't have any other outstanding debts, but in reality, it's the other way around. Having an established credit history, using those cards frequently, carrying a reasonable balance, and scrupulously paying them back on a month-to-month basis are all big plusses when it comes to borrowing.
Another thing that may surprise you is that lenders are more interested in how you are managing your money right now - and not AS interested in your past payment history. The fact that your parents maintained balances for many years and paid them off is not as powerful a "recommendation" for future credit as the cards and balances that they have at the time they apply for more.
In other words, it's good advice not to close out all of your credit cards. Pay off balances on cards that have the highest interest rates (they're costing you the most), and keep paying off those lower interest cards on a monthly basis.
Remember - this is just generic advice - your parents may need to retain more liquidity with their money, because of their own unique circumstances (age, health, needs of the children, etc.). Real estate has been a tremendous investment for many years, but it's notoriously non-liquid, meaning it takes a lot of time and a lot of expense to get equity out of a home. Other investments (stocks, bank accounts, etc) may have lesser returns, but provide much faster access to money when an emergency arises.
Definitely speak to a financial advisor who knows your parents' unique circumstances before committing to any particular plan of action.