Accept loan offer and pay off credit card debt?
September 27, 2023 12:58 PM Subscribe
I've been getting loan offers through Credit Karma and others...should I get one in order to pay off my credit card debt? More info under the fold...
I have about $14k in credit card debt, on three cards – I know, not awesome, but it is what it currently is. It is my only debt save for my car lease. At this time, I am not in a place to try and snowball my payments or other methods. I have good credit and have received offers through my bank, Credit Karma and even my union for loans that would pay off that debt. I've always wondered: is this a good idea? Is it best to be making one larger payment per month than a few smaller ones? And if so, what kinds of terms should I be looking for? What I don't want is to feel like I'm solving one problem but then creating an equal or larger one. To be clear, I would only be getting a loan just slightly more than what I owe on the cards, ie I'm not here for a $50k loan – even though there's plenty of companies that would apparently love to give one to me haha.
Any experience/insight etc would be great, thanks!
I have about $14k in credit card debt, on three cards – I know, not awesome, but it is what it currently is. It is my only debt save for my car lease. At this time, I am not in a place to try and snowball my payments or other methods. I have good credit and have received offers through my bank, Credit Karma and even my union for loans that would pay off that debt. I've always wondered: is this a good idea? Is it best to be making one larger payment per month than a few smaller ones? And if so, what kinds of terms should I be looking for? What I don't want is to feel like I'm solving one problem but then creating an equal or larger one. To be clear, I would only be getting a loan just slightly more than what I owe on the cards, ie I'm not here for a $50k loan – even though there's plenty of companies that would apparently love to give one to me haha.
Any experience/insight etc would be great, thanks!
Besides the interest rate I think the other thing you need to pay attention to is the payment amount and payment schedule on the new loan - if e.g. you're paying the minimum on your credit cards now, the monthly payment on your new loan could end up being more than you're currently paying per month. You need to make sure the payment amount is an amount you can actually afford.
posted by mskyle at 1:15 PM on September 27, 2023 [3 favorites]
posted by mskyle at 1:15 PM on September 27, 2023 [3 favorites]
Also, be cautious about whether you have to "put up" something to secure the loan, like your car or house. It's rarely a good idea to transfer unsecured debt to secured debt.
posted by OrangeDisk at 1:21 PM on September 27, 2023 [5 favorites]
posted by OrangeDisk at 1:21 PM on September 27, 2023 [5 favorites]
This is a complex problem, with no simple answers.
Firstly, I’m confused by your statement about not being in a place to snowball your payments. How will paying back a loan be easier? If the payment is significantly lower, how long will it take you to pay it off, compared to paying off credit cards?
The loan will be a hit on your credit, so know that going in. I’d be careful about the collateral for the loan too - if you own a home, that *could* be problematic.
Look at your various interest rates you’re paying on your credit cards, and compare that to the loan interest.
Also, have you gotten any balance transfer offers for 0% interest (usually for a year, plus a fee for the transfer). I used a couple of those when I was paying down credit card debt. It was great because there was no carried interest making my balance grow.
For myself, the exercise of paying down the debt myself was an excellent way to gain the discipline to never let that happen again. I had about the same amount of cc debt as you, and I paid it off in a year, using IRS refund to help jump-start it, then doing some serious belt-tightening. After everything was paid off, I was shocked at how freeing it was, and at how much more money I had each month - I was able to build a substantial emergency fund in the following year.
posted by dbmcd at 1:21 PM on September 27, 2023 [6 favorites]
Firstly, I’m confused by your statement about not being in a place to snowball your payments. How will paying back a loan be easier? If the payment is significantly lower, how long will it take you to pay it off, compared to paying off credit cards?
The loan will be a hit on your credit, so know that going in. I’d be careful about the collateral for the loan too - if you own a home, that *could* be problematic.
Look at your various interest rates you’re paying on your credit cards, and compare that to the loan interest.
Also, have you gotten any balance transfer offers for 0% interest (usually for a year, plus a fee for the transfer). I used a couple of those when I was paying down credit card debt. It was great because there was no carried interest making my balance grow.
For myself, the exercise of paying down the debt myself was an excellent way to gain the discipline to never let that happen again. I had about the same amount of cc debt as you, and I paid it off in a year, using IRS refund to help jump-start it, then doing some serious belt-tightening. After everything was paid off, I was shocked at how freeing it was, and at how much more money I had each month - I was able to build a substantial emergency fund in the following year.
posted by dbmcd at 1:21 PM on September 27, 2023 [6 favorites]
Please provide the interest rate (APR) for each of your credit cards and the balance you're carrying on each.
Please provide the terms and APR for the loan offers you're getting.
Then we can offer some advice.
posted by phunniemee at 1:25 PM on September 27, 2023 [19 favorites]
Please provide the terms and APR for the loan offers you're getting.
Then we can offer some advice.
posted by phunniemee at 1:25 PM on September 27, 2023 [19 favorites]
Also important to know: what are the fees and other costs associated with this CreditKarma offer?
Bascially, what you're going to want to do is compare the total cost of credit card debt vs. total cost of CreditKarma loans. I know that there are other factors involved, such as your credit rating improving and your anxiety decreasing, but put that aside for a second and let's tally up the hard $ cost totals for each side (which should include interest rates, loan duration, and fees on both sides) and assess the concrete risks of the move (which includes what you're going to use as collateral on CreditKarma and other terms and conditions of the loan). Can you provide these numbers so we can help?
posted by MiraK at 2:00 PM on September 27, 2023
Bascially, what you're going to want to do is compare the total cost of credit card debt vs. total cost of CreditKarma loans. I know that there are other factors involved, such as your credit rating improving and your anxiety decreasing, but put that aside for a second and let's tally up the hard $ cost totals for each side (which should include interest rates, loan duration, and fees on both sides) and assess the concrete risks of the move (which includes what you're going to use as collateral on CreditKarma and other terms and conditions of the loan). Can you provide these numbers so we can help?
posted by MiraK at 2:00 PM on September 27, 2023
I have had WAY more credit card debt than that, so don't be embarrassed.
The main concern I've heard and would have is that a lot of people consolidate their credit card debt, then start using their credit cards again, so they end up with the consolidation loan in addition to credit card debt. So if you decide to do this, it would be absolutely imperative that you stop using the credit cards, which can be very difficult, as they are so fucking easy to use. Again, don't be embarrassed. Lots of very smart people want you to get into massive credit card debt so that you are making small payments forever and ever. They are very good at what they do, and it can be hard to fight against it.
(Some people find the Dave Ramsey snowball approach of paying off the smallest debt first better because it works for them psychologically even though they end up paying more interest that way. Credit card debt can be an emotional as well as a financial issue, so what is best for other people may not be best for you.)
posted by FencingGal at 2:44 PM on September 27, 2023 [11 favorites]
The main concern I've heard and would have is that a lot of people consolidate their credit card debt, then start using their credit cards again, so they end up with the consolidation loan in addition to credit card debt. So if you decide to do this, it would be absolutely imperative that you stop using the credit cards, which can be very difficult, as they are so fucking easy to use. Again, don't be embarrassed. Lots of very smart people want you to get into massive credit card debt so that you are making small payments forever and ever. They are very good at what they do, and it can be hard to fight against it.
(Some people find the Dave Ramsey snowball approach of paying off the smallest debt first better because it works for them psychologically even though they end up paying more interest that way. Credit card debt can be an emotional as well as a financial issue, so what is best for other people may not be best for you.)
posted by FencingGal at 2:44 PM on September 27, 2023 [11 favorites]
If the consolidated loan has a lower interest rate than your three credit card accounts, then you should roll those balances into the new loan — assuming that there are no penalties for prepayment. BUT THEN — focus on making the largest possible payment each month to that loan account, AND pledge to yourself not to amass any further credit card debt.
posted by beagle at 2:48 PM on September 27, 2023 [2 favorites]
posted by beagle at 2:48 PM on September 27, 2023 [2 favorites]
I get offers to transfer my balance at 0% for a year or so. 0% is my preferred interest rate, of course. Can you be disciplined and not acquire more credit card debt? If so, reducing the interest is a good idea. Whatever you're paying now, keep paying at least that much, even if it's more than the minimum payment on a consolidation loan. Not having credit card debt feels so great. It's better than almost anything I've put on a credit card. The actual cost of purchases if you pay the minimum is horrifying.
posted by theora55 at 3:03 PM on September 27, 2023 [1 favorite]
posted by theora55 at 3:03 PM on September 27, 2023 [1 favorite]
Yes, amounts and current interest rates matter; with good credit, maybe one of your existing credit cards offers zero-interest balance transfers and you can consolidate the debt onto one card rather than taking out a loan. Or, you qualify for a new card with low or zero-percent apr for x amount of time and low or zero-percent interest for balance transfers, and you corral the debt there and freeze (do not cancel) your original cards.
posted by Iris Gambol at 3:05 PM on September 27, 2023 [2 favorites]
posted by Iris Gambol at 3:05 PM on September 27, 2023 [2 favorites]
Totally depends on the rates on the cards vs the rate on the loan. The actual math doesn't necessarily work out better just because it's all in one place.
My approach is to shift the larger balances I'm paying down between 0% interest cards. Sometimes you'll find those offers on existing cards (that you do not currently use--do not transfer anything if you already have a balance on a card), otherwise with good credit the offers are out there. There's usually a 3% transfer fee, but depending on the rate on the card(s) you're transferring from and what you'd otherwise pay in interest, it can (and for me, does) make sense. With this approach I have consolidated down to payments in two places. The only disadvantage I see to this compared to taking out a debt consolidation loan which will not be at 0% is that you need to stay on top of it and move things around every 12-18 months. But the numbers make enough sense to me to toss the loan offers as a rule.
posted by wormtales at 3:48 PM on September 27, 2023
My approach is to shift the larger balances I'm paying down between 0% interest cards. Sometimes you'll find those offers on existing cards (that you do not currently use--do not transfer anything if you already have a balance on a card), otherwise with good credit the offers are out there. There's usually a 3% transfer fee, but depending on the rate on the card(s) you're transferring from and what you'd otherwise pay in interest, it can (and for me, does) make sense. With this approach I have consolidated down to payments in two places. The only disadvantage I see to this compared to taking out a debt consolidation loan which will not be at 0% is that you need to stay on top of it and move things around every 12-18 months. But the numbers make enough sense to me to toss the loan offers as a rule.
posted by wormtales at 3:48 PM on September 27, 2023
I went a totally different route for this same problem and enrolled in a debt management plan with a credit counselor. I called the NFCC's hotline to hook up with an accredited agency, who did a pretty thorough debt inventory with me over the phone prior to enrollment.
They contacted all my creditors and negotiated significantly lower interest rates on my debt, and flipped the terms such that I'd be paying off the principal first. I agreed to a monthly amount I could actually handle (roughly equivalent to the sum of all minimum payments on my cards), and I make that payment as a lump sum to my agency every month, who then post it to the companies on my behalf. All my cards were frozen and can't be reopened, but I'll be debt-free after the term is over ... and since they aren't actually negotiating down the debt amounts - only the interest rates and terms of payment - it doesn't significantly impact my credit score like some of the more nuclear options might do.
I decided to go this way because taking on any more debt - even as a shelter for existing debt - just felt like contributing to the spiral. Eventually, those zero-interest terms vanish, and you're left holding potentially an even bigger bag, or at least one roughly the same size to the one you have now. Plus, I had to detonate my cards. Merely transferring off the balances means they were free and clear for all kinds of abuse, even the kinds I may think are "justified" in the moment (e.g., gear upgrades for work, veterinary expenses, dental work, etc). I'll be eligible to reopen new accounts once this cycle is paid off, since it will show me in good standing, but ... I have no intention of doing so.
posted by mykescipark at 4:21 PM on September 27, 2023 [8 favorites]
They contacted all my creditors and negotiated significantly lower interest rates on my debt, and flipped the terms such that I'd be paying off the principal first. I agreed to a monthly amount I could actually handle (roughly equivalent to the sum of all minimum payments on my cards), and I make that payment as a lump sum to my agency every month, who then post it to the companies on my behalf. All my cards were frozen and can't be reopened, but I'll be debt-free after the term is over ... and since they aren't actually negotiating down the debt amounts - only the interest rates and terms of payment - it doesn't significantly impact my credit score like some of the more nuclear options might do.
I decided to go this way because taking on any more debt - even as a shelter for existing debt - just felt like contributing to the spiral. Eventually, those zero-interest terms vanish, and you're left holding potentially an even bigger bag, or at least one roughly the same size to the one you have now. Plus, I had to detonate my cards. Merely transferring off the balances means they were free and clear for all kinds of abuse, even the kinds I may think are "justified" in the moment (e.g., gear upgrades for work, veterinary expenses, dental work, etc). I'll be eligible to reopen new accounts once this cycle is paid off, since it will show me in good standing, but ... I have no intention of doing so.
posted by mykescipark at 4:21 PM on September 27, 2023 [8 favorites]
Also I think it's important to internalize that you're not "accepting" a loan "offer" any more than you go to Chipotle to accept a $11.20 chicken burrito offer. These companies are sending you marketing, advertising their debt at you, because they know you are a good customer who likes to accrue debt.
There are ways to make math work in your favor, but please don't be fooled for a moment that any of this is a good lifetime product for you, or that these creditors mean you well.
posted by phunniemee at 4:38 PM on September 27, 2023 [10 favorites]
There are ways to make math work in your favor, but please don't be fooled for a moment that any of this is a good lifetime product for you, or that these creditors mean you well.
posted by phunniemee at 4:38 PM on September 27, 2023 [10 favorites]
don't be fooled for a moment that any of this is a good lifetime product for you, or that these creditors mean you well
They're not doing it for your benefit, but it can still be profitable to offer significantly cheaper debt than credit cards. IMO it's definitely worth doing a bit of number crunching on this.
posted by aubilenon at 5:58 PM on September 27, 2023
They're not doing it for your benefit, but it can still be profitable to offer significantly cheaper debt than credit cards. IMO it's definitely worth doing a bit of number crunching on this.
posted by aubilenon at 5:58 PM on September 27, 2023
It's not particularly complicated to work out what the relative costs are of the current credit cards and a single loan - you can see exactly how much interest you're paying on the cards and how much you're actually paying off each month. You can calculate what the monthly interest payments and how much you'll pay of the principal are on the loan at commencement and a simple 'which is more per month' will give you a pretty good idea of whether it's better to consolidate in this way. It does get complicated trying to work out the overall total cost comparison because of compounding interest and the terms will be different (credit cards, obviously have no actual term). But, if the interest rate of the loan is lower than that of the cards (almost certainly) and the duration of the loan doesn't leave you paying more interest overall, you're almost certainly better off with the loan. You should take out the loan for the shortest duration you can afford to, because that will save significantly on the amount of interest overall.
A big 'but' though - you should cancel all the cards as soon as you've paid them off, because the risk here is that you end up with a loan and a bunch of credit card debt as well over time. Maybe keep one with a small balance for emergencies, but it's quite common for people to finance paying off credit cards and then go wild with all that credit they now have on the cards.
Getting rid of that monkey on your back can be very beneficial emotionally, as well.
posted by dg at 6:55 PM on September 27, 2023
A big 'but' though - you should cancel all the cards as soon as you've paid them off, because the risk here is that you end up with a loan and a bunch of credit card debt as well over time. Maybe keep one with a small balance for emergencies, but it's quite common for people to finance paying off credit cards and then go wild with all that credit they now have on the cards.
Getting rid of that monkey on your back can be very beneficial emotionally, as well.
posted by dg at 6:55 PM on September 27, 2023
To be clear, I would only be getting a loan just slightly more than what I owe on the cards
Why more? Only borrow exactly what you need, even if it is not a round number. Yes close all but one account and realize it will mean a small temporary hit to your credit rating. That is okay because it will most likely pass before you need more credit. Keep one recurring charge on your only card and pay it off every month.
posted by soelo at 7:30 PM on September 27, 2023 [2 favorites]
Why more? Only borrow exactly what you need, even if it is not a round number. Yes close all but one account and realize it will mean a small temporary hit to your credit rating. That is okay because it will most likely pass before you need more credit. Keep one recurring charge on your only card and pay it off every month.
posted by soelo at 7:30 PM on September 27, 2023 [2 favorites]
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posted by chesty_a_arthur at 1:05 PM on September 27, 2023 [10 favorites]