I got myself into a bit of trouble with credit cards last year when i had a dry spell at work, ended up accumulating about $5,000 in credit card debt, and missed a couple payments.
So right now my $5000 is getting charged 22% interest.
Credit is still good (mid-600s), i have equity in my mortgage, have some student loans.
But basically all i want to do is take out a $5000 loan, pay off, and destroy my cards so it doesn’t happen again.
You guys are not my banker, but does this seem like a reasonable thing to pursue?
You could get a second mortgage or equity line of credit on your house, but I’m not sure the interest rate would be that much lower. Something you can check out.
There’s lots of information you haven’t given us. Will the bank loan be secured? (E.g. if you fail to pay it off, is your house at risk?) Will the bank loan be for a fixed term, such that you will be paying it off over a much longer term than you would be paying off the credit card loan?
If this is unsecured, for a lower interest rate than your credit card loan, and capable of being paid off, without penalty, as rapidly and as soon as you choose, then I’m not seeing any downside.
PS: You can destroy your cards now. You don’t have to wait until you have repaid the CC debt to do that.
Its a very reasonable thing to do if there are not a lot of fees associated with the loan, or they are small enough that the reduced interest will recoup the fees within the foreseeable future.
Do you have a job/steady source of income? You should put every cent you can spare into paying off this card loan with 22% interest, even if it is only $10 over the minimum payment every month. No investment will give you a better risk free return. Not even close.
Can you be disciplined enough to not run up more debt on the credit cards? I know you said you will cut them up, but they eventually will send new cards, or “write a check for cash!” offers in the mail.
Even if you can’t get a loan with less than 10% interest rate, you will still be saving a ton in interest if you use it to pay off the credit card debt.
Don’t get the loan and then not pay off the card. That would be incredibly bad.
If you have equity in your mortgage like you say you do an equity line of credit is fairly easy to secure. The rates are usually a few points more than typical mortgage rates which should be waay less than your 22%.
The danger is that this sudden infusion of cash from a loan can entice you into running up another few thousand in credit card debt – this time with your house at risk! You’ve already shown that you have a weakness for overspending on credit. So make sure that you really do learn from this, and resist the temptation of easy credit spending. But if you can, you will pay this off much faster & cheaper.
It’s timely that you ask this question, I just did the same thing for the same amount. I had to take a 60 month option, but still paying off the credit card debt for half the interest and half the time can’t be anything but a good thing. I can pay extra any time, no cost no penalty, and hopefully pay it off a little earlier.
So get a signature loan for $5000, do the exact same thing, only pay it off in 4 months instead.
With a good credit score and an income, I don’t think you will have to do anything complicated like put up your car or pull equity out of your house. You just need a signature loan.
Are there debt advisors where you live? They might be able to give you good, location-specific advice.
But yes, a bank loan would be a much better idea than just paying off the credit cards, as long as you can get a loan that’s not attached to your house. If you can get a loan that allows you to pay off more and earlier, that would be even better, but I don’t know if that would be possible.
You have reasonable credit, a job and a home, so credit cards are the worst thing for you to be paying off.
You could also look into one of those “0% for the first year for balance transfers” credit card offers. Might be faster and cheaper than a bank loan, since it’s only $5K.
Having an unsecured line of credit available to you is not a bad idea. I wouldn’t hook the loan up to any collateral if you can help it at all - our line of credit is not associated with our house or cars or anything like that. Losing your house or car over a $5000 loan is not a good idea. Our line of credit is at prime plus two per cent, I believe. We try not to carry a balance on it, but it is useful when a big purchase comes up and we can split the payments over a few months.
ETA: Forgot to address the balance transfer idea - it should work in theory, but we tried doing that, and it didn’t work anywhere near as well as we thought it would. I’m not sure why - too much screwing around, I think - transfer in, make payments, remember to transfer out again, etc. etc.
The key thing to realize is that the credit card debt in this situation is not the problem, it’s a symptom of a problem. In other words, the problem is how finances have been managed and the result is a debt.
In that light, a loan from the bank is a decent approach to taking care of the symptom and getting the debt paid off. I wouldn’t argue against it from that standpoint.
But, OP, be sure that you are really paying attention to the source problem. When many people refinance debt, the source problem is still there and they find that they run up all the new debt, so that they go from 5k in debt to 10k in debt. Virtually everyone blames the debt on some uncontrollable, external factor like job loss or the economy but those are often just convenient excuses for the core problem.
This is really true. This is the reason (and really the only reason) people tend to be leery about advising others to take out loans to pay off high interest debt. From a math standpoint, it’s a no brainer – lowering your interest rate is always in your favor, all other things being equal. But human nature being what it is, people who do this often tend to end up worse off than if they had just sucked it up and paid the original debt, because all other things don’t remain equal. People relax and allow themselves to indulge in more spending or less aggressive repayment, and end up with a loan bill and a credit card bill.
So, the real question is whether you can commit to improving your finances and have the discipline to stick to it. That means not only avoiding taking on any new debt or unnecessary spending while you pay off the $5k, but also transitioning those debt repayments into savings payments after it’s paid off to build up an emergency fund. Once you have that, future roadbumps won’t automatically lead to similar credit card bills and you’ll be less subject to being creamed by random circumstances.
Mid 600’s doesn’t seem like that good a credit score. Credit Karma says that 640 is the cusp between poor and fair. I’m with the people that think that spending more than she/he makes is the problem here and the debt is a symptom. TNWPsycho needs to straighten up his/her finances to the point where a dry spell at work doesn’t result in $5,000 in credit card debt and missed payments.
Don’t do this!
The bank can offer this because sometimes they manage to gain possession of the house, which they then resell for a profit. And it happens often enough that they can give this low an ‘introductory’ rate – you can be certain that they have calculated this, and that the odds are in their favor.
Same with the 0% balance transfer idea, like Cat whisperer said. The credit companies only offer this because they make a profit on it – enough people get caught by the tricky rules they have that they end up paying significantly more than 0% on this.
As several people have said, this debt is just a symptom of the real problem – you got into an overspending spree. Your lack of financial discipline was the real problem. That you recignized this problem at only $5,000 debt is a good sign – many people get far deeper than that before seeing the problem.
You need to pay off the debt, but also use this to stiffen your financial resolve, so it doesn’t happen again. So doing like Urban redneck & manda suggested is a good idea: working an extra job and really cutting back on expenses to pay this off quickly. Besides the financial benefits of paying it off witl minimal interest, the few months of suffering – absolutely no restaurant meals and nothing but basic cable tv and only 1 movie per month, etc. – will be something you can look back at whenever you are tempted to spend too much. Learning the cost of overspending when you’re young is a good thing. And it has to hurt for you to really absorb this lesson.