likewhoa84 asked:
I recently graduated college and was unemployed for several months afterward. My savings, etc, quickly ran dry, and I began carrying a credit card balance to live. I’ve begun working (finally), but my credit card balance is quite high now. The interest rates on my two cards range from 11.9% to 16.9%.
I recently graduated college and was unemployed for several months afterward. My savings, etc, quickly ran dry, and I began carrying a credit card balance to live. I’ve begun working (finally), but my credit card balance is quite high now. The interest rates on my two cards range from 11.9% to 16.9%.
I’ve just finished paying for my car, so I now own it outright. The resale value is fairly high. I think I can get a personal loan through my bank to pay off my credit cards, especially if I use my car as collateral, at a rate of 8.9%.
I’m sure these compound differently, but I just don’t know enough about it to compare the costs. So, three questions:
1 – Would it save me money (in interest) to pay off the higher interest credit card balances with a personal loan through my bank?
2 – Is it wise to use my car as collateral?
3 – Does a personal loan “look better” on a credit report, compared to credit cards with high balances?
Thanks in advance!
Minnie
#1 by roderick_young on December 31, 2010 - 12:25 pm
Rosa
I don’t know how big your balance is on those credit cards, but let’s say it’s $10,000. That means, crudely, $1690 of interest, assuming it’s all on the higher card (worst case). The car loan would have interest of $890 a year (crudely), so that’s an $800 savings. Assuming there were no set-up fees and miscellaneous charges for getting the personal loan. That assumes that you pay down none of the principal, which, of course, you will be, so the savings will be less. If your credit card balances are less, then the savings will scale down in proportion.
Personally, I would NOT get another loan, as the bulk of my savings is going to be through agressively paying down the credit cards, not a lower interest rate. Live frugally, don’t eat out, and avoid driving as much as possible. The debt will be gone soon.
Of course, you want to pay more towards your 16.9% card than the 11.9% one. But you must pay something on the lower interest card, or they’ll jack up the interest rate because you missed a payment, or are paying too slowly. I would say allocate 20% of your gross income, however little that is, toward paying off the cards. Pay the larger of 2% of the outstanding balance, or the minimum payment, on the 11.9 card. Put all the rest into the 16.9 card. And store the 16.9 card away somewhere, don’t carry it with you, where you might use it.
#2 by ? on December 31, 2010 - 3:31 pm
Ralph
All the answers to your questions depend on how much unsecured debt you have. My suggestion is not to make your unsecured debt secure by getting a loan, because then you have no options like renegotiating with your creditors on the balance of that debt. I started a yahoo group called FreedomFromUnsecuredDebt where you can join and post similar questions and get more detailed answers.
Hope this helps you.
Rob
#3 by Jeanne R on January 2, 2011 - 2:46 am
Warren
At this point, it really doesn’t matter if the debt is for credit cards or a personal loan, it is still debt on the credit report. It may be better from an interest point of view to do the personal loan but that is a decision that only you can make. It is better to pay off the higher interest rate card first. Please do not consolidate or use a debt reduction company . It is not free, they will lower your payments by increasing the length of time until you are debt free, and you will take a hit on your credit score. Or they negotiate your debt down after telling you not to pay for awhile adding another hit to your credit score. Student loans are the only debt that can garnish your wages for non payment without taking you to court first. Just list them out on a piece of paper or a spreadsheet and follow the plan. If you work the plan, the plan will work for you.
A. Have a garage sale and sell anything that you no longer need or want.
B.Get a temporary part time job, if you have one, get another.
Here is a plan that can help you. If you work the plan, the plan will work for you:
1. Make a budget. Make the budget a week before you get paid. A budget is not a punishment! It is a tool which will free you from ever having to worry about money again. Put everything in your budget. Especially those annual, biannual, or quarterly bills like car registration, insurance, etc. Give every dollar you are going to bring home the name of where it is going. Add an “emergency fund” category to your budget for 25 dollars and save up until you have 1000-1250 dollars. Your emergency fund will help keep you from getting into new debt because of an emergency. If you can, set up a direct transfer to a savings account for your emergency fund. That way it moves automatically and you don’t even have to worry about it. You must cut your spending and live on less than you make.
2.First get current on all of you debts and make no more late payments. Stop using your credit cards immediately. Do not take on any more debt. Credit cards are like quicksand only the death is much slower. Make a list of all of your debts in order of highest interest rate to lowest interest. Use cash only for your spending from now on.
3.Pay the minimum due on all of your debts and then put your extra money towards paying off the highest interest one first. After you get that one paid off, you put the money you were paying on debt #1 (the minimum payment and the extra payment) towards debt #2. That will pay debt #2 off faster. When that is paid off, you put all three payments towards card #3 and that one will be paid off pretty quickly. As an example:
To start :
Debt #1 (highest interest): minimum payment+ extra payment
Debt #2 (middle interest): minimum payment
Debt #3(lowest interest): minimum payment
Debt #1: paid off
Debt #2: minimum payment from Debt #1+ Minimum payment from Debt #2 +extra payment
Debt #3: minimum payment
Debt #1: paid off
Debt #2: paid off
Debt #3:Minimum payment from card #1+ minimum payment from Debt #2+ minimum payment from Debt #3+ extra payment.
That way, you will get them all paid off, on time, and pay the least interest. It will also help towards rebuilding your credit since you will no longer have any late payments. This works no matter how many different debts you may have.
4. After you get all of your debts paid off, add to your emergency fund until you have 6-12 months of income saved up. Put that emergency fund money into a liquid money market fund or into a Bank of America no-risk CD so that if you need the money you can take it out without penalty.
5a. When you have your emergency fund in place, add a category for “fun” to your budget. Save for a holiday, a vacation, a big screen, or dinners out, whatever goal you want. Remember to enjoy your life.
5b. When you have your emergency fund in place, start saving for your retirement. Join the 401(k) plan at work and contribute the maximum. Your employer probably matches at least part of your contribution so why give up free money? Open a Roth IRA and contribute the maximum on a monthly basis. If you start saving for your retirement now, you will probably retire a millionaire.
5c. When you have your emergency fund in place, start saving for your next car. Only buy cars, or other things that depreciate, with cash. Save up for a nicer car. That way you get the interest instead of paying the interest.
You can do it and it isn’t as hard as you think. Just follow the plan.