So I’ve got my whole Debt Reduction Plan set up and ready to push into motion beginning in Nov/Dec, but now I’m wondering if I should look into the idea of taking out a personal loan to wipe out the cards in one swoop, and then just pay off the loan within the year. One of the big cautions against this method is that many people get the loan, pay off their cards, and then run their cards right back up, leaving them with a big loan payment on top of their credit card payments. No worry of that here, I’m what you might call CURED.
But I’m wondering if the personal loan method might be a good option for me. Mainly, because I just remembered that my name has been on my mother’s Credit Union account since I was 16. I also financed my first car through credit union, and paid it off satisfactorily. As such, I’m pretty sure I’m in really good standing with them, and could hopefully get a decent rate. I’m going to share my cards and interest rates with you, which, I’m well aware, are truly ATROCIOUS. And since they’re all pretty much maxed out, I don’t think I’d gain much tread with asking for lower rates until I’ve paid them down some. Now that I’ve become financially enlightened, for lack of a better term, I cannot even believe that I’ve been paying these sky-high rates for so long without complaint. Not to mention, it seems like it should be ILLEGAL or something. Anyone ever heard of USURY? Geez..
My cards & their horrible interest rates (and no lectures, I know, I know):
Card 1 – 30.24%
Card 2 – 29.99%
Card 3 – 23.99%
Card 4 – 23.15%
Card 5 – 22.80%
Card 6 – 21.21%
Card 7 – 20.24%
Card 8 – 18.24%
Card 9 – 18.00%
Card 10 – 14.99%
Card 11 – 13.90%
Card 12 – 9.90%
Yeah with rates like these, who needs enemies. So I’m thinking, I can pay these off within a year with my debt plan, but if I got a personal loan with even an 11% fixed rate, I could save a LOT more in interest. Think I’ll be applying for the loan this week.
6 Comments
September 18, 2007 at 2:53 pm
WOAH! And I thought I had it bad!
I don’t know what your excess income is like, but here was my problem when considering consolidating everything I have into one loan at my credit union (CUs are great, eh?): The minimum payment would be much higher. Why? Because you can take 30 years to pay off a credit card if you want, but generally only as much as 5 years to pay off a loan. Now, what if something happens some random month? On my current road to eliminating debt, I can just pay the minimum payments on everything. In doing consolidation, of course you can still pay as much extra as you want to get rid of it quicker, but the minimum payment is much higher than the sum of the parts.
Just in case, make sure you actually cut them up. Maybe not all of them… but certainly most of them.
September 18, 2007 at 2:58 pm
Jake:
September 18, 2007 at 3:54 pm
Wow, those high rates are a killer, and maxing out all your cards will ding your score. Just a few pointers, there are penalties to your credit score for applying for credit, but they are small and last 12 months, but bigger penalties for using over 50% of your trade lines and 80% of your trade lines.
Here was my debt reduction technique:
1. Open a new balance transfer credit card, there is a list at the site I blog for, Cardpick.com, in their balance transfer credit cards section, but other credit card comparison sites have more information
2. Transfer as much of your high interest balances as they will let you. Try to get at least a 6 month teaser rate of 0% – 3%, and most of them will reset to a normal 10%-15% rate after the teaser rate expires
3. Do NOT close out the old cards, you want to let your credit report age over time, the higher score will give you access to cheaper credit over time
4. Look online for your credit cards that you just paid off, many of mine, including ones that dumped me into default rates of 25%-30% for making a payment a few days late, will offer transfer rates of 8%-10% for transferring from other cards. If you apply for too many credit cards, your score will plummet and you’ll lose your flexibility.
5. Walk your way down the list, if you can move your 30% cards to 0%, and your 20%+ cards to 8%-10%, you’ll find that you are saving a decent amount in interest each month, use that to pay down the highest interest cards.
6. Instead of “just paying down the highest interest rate,” look for cards that you can pay off in full. While the highest interest rate debt makes a lot of sense to retire, the transfer option may make it more worthwhile to pay off a lower rate card.
7. If you have a 15% card with a limit of $1000 and a balance of $400, if you spend your “repayment money” of $400 in one month on that card, you now have a clean card. You can then transfer $1000 from a high rate card (more likely, $950 because of transfer fees) to this card. This might help you more than saving one month of interest on the $400 on a higher rate card, because you will then lower the interest on the entire amount transferred.
8. You can open new “teaser rate” cards, but do it carefully. Too many will damage your credit, it’s a balancing act between preserving your credit score (to keep options open) and not paying a premium. It’s probably worth $25/month in extra interest to keep a good score, it probably isn’t worth $1000/month.
9. Remember, opening trade lines and applying for credit is a 12 month hit, being high balance is a hit as long as you are doing so (and I think it ages down over 3-6 months), but missed payments can ding your for seven years.
Good luck, and keep the faith!
September 18, 2007 at 9:54 pm
I took out a personal loan last year to pay my credit cards. $10K. Then my dumb azz went and charged another $10K to my cards. If I would have stayed strong and done what I should have it would have worked out perfectly. Now I have to pay off the credit cards and loan. Taking out a loan will actually increase your credit score. Its secured credit while credit cards are unsecured. If you believe you will be able to stay with your goal then I say go for it. My loan rate was 16.5% and my average credit card APR was 24%. There is a $100 repayment penalty for my loan.
September 18, 2007 at 10:44 pm
You never know until you try so call to see if some of the cards will lower your rate. Every little bit helps. If you can pay all the cards off within a year as is, I would NOT get the loan. Use the snowball method and keep trying to get those rates lowered.
September 27, 2007 at 12:57 am
[...] I paid $55 on the account, as I do every month, $40.36 had been leveled in interest (remember, I have horrible interest rates), giving me a grand total of $14.64 toward the actual principle, which is around $1,500. With [...]