Done Gone To Debt Hell

February 22, 2007 4:43 PM

Does consolidating your credit card debt wreck your credit history or kill your credit score (FICO)?

I was a damn fool in college and in over 12 years, managed to rack up about $13k in credit card debt (I have no other debt, no loans). I have a decent job and am trying to pay it off, but it keeps being two steps forward, three steps back. I have around seven CC accounts. I'd like to get it down to one. Having accounts spread out makes it hard to focus and I am getting nowhere. I know I could handle it better if I had one bill to deal with monthly, but I keep hearing consolidation will kill my FICO score.

I've read Suze Orman and Dave Ramsey, so I need more suggestions besides picking up their books.

posted by miltoncat to work & money (25 comments total)

I don't know why consolidation would kill your score. It shouldn't -- it's just a loan from a bank so you owe the money to one institution instead of several.

However, credit counseling is a major black mark and will definitely negatively impact your score. If there's no loan involved, but instead you keep the accounts you already have and the credit counselor doles it out to your creditors, then it's just a payment plan and not consolidation.
posted by kindall at 4:51 PM on February 22, 2007

I was in the same situation, and couldn't get a loan because I don't own a house. I ended up getting a relative to get a low-interest card in his name (since my credit was bad, and I couldn't get one of my own), which I used to consolidate my debt. I'm now paying him back, at much,much lower cost. I'm saving a couple hundred bucks a month in interest.
posted by Green Eyed Monster at 4:53 PM on February 22, 2007

One of the factors in your credit score is utilization, aka what percentage of your available credit that is currently being used. They reason that if you are using most of the credit that someone is willing to give you, you are living beyond your means and a bad risk for future loans.

In this case, if you consolidate to one or two cards and then close the others, your utilization will go way up. So don't close them.
posted by smackfu at 5:09 PM on February 22, 2007

I have a good credit history and wondered why my actual score wasn't higher. I was told that the more credit cards you have (even ones you never use but have never cancelled) the more you are considered a credit risk. I suppose it makes it look like you keep adding cards so youc an rack up more debt. So, based on that, I'd say it would be best to get it all on one card. But I'm not a financial advisor; that's just my experience.
posted by Lockjaw at 5:09 PM on February 22, 2007

Having accounts spread out makes it hard to focus and I am getting nowhere.

Is your problem that the interest is eating you alive or that you're unorganized?

If you're only looking to consolidate because you can't keep track of seven different statements then maybe the answer is in creating a filing system. (Folders? spreadsheet? sticky notes?) Most cards and banks provide online option too - so you could possibly go completely paperless.

Once you've got everything in front of you I'd call up each company and tell them that unless they lower your interest rate that you're going to consolidate and zero out your balance. They should budge some.

Then I'd attack the card with the highest interest rate while making the minimum on the others. Then take them down to zero one after another.

Closing an account will zing your score (which seems completely asinine to me, but thats the way it works...) so it's better just to zero them out and if any charge a yearly minimum you could close one every six or 12 months. Also, by paying down your debt you're going to wind up with a great score. (After you zero them out, cut up the card.)

Be patient - it'll take you a while to get organized. Good luck!
posted by wfrgms at 5:20 PM on February 22, 2007 [2 favorites has favorites]

In my experience, the answer is definitely no. As kindall said, it's just another loan that you're taking out which should, theoretically, be no larger than the debts you currently have. It would only negatively impact you if you miss payments on the consolidation loan or default on it, but that would be the case for any loan upon which you miss payments on.

Mind you, I live in Australia, not the US, so YMMV.
posted by Effigy2000 at 5:36 PM on February 22, 2007

A few things I've learned over the years:

1) Your credit score doesn't matter, at all, unless you plan to buy a car or house in the next few months/year. Sure, future landlords, insurance companies, and even employers might view a low score as a potential liability, but the worst thing that's happening to you right now is that you're paying WAY TO MUCH to banks in interest (and who really don't deserve your money).

2) Because you have a large amount of debt relative to your income and spread all over the place, future loans are more difficult to apply for because you're already viewed as maxed out by the banks. So the best thing to apply for is a secured loan that is ultimately backed by some expensive collateral (like a house or car). If you have neither, then you're kinda stuck. So the second best thing to do is just pay minimums on everything but the most expensive (interest-wise) loan. Once you knock one out, it becomes like dominos and eventually they all go away. But you need to take that first step.

3) $13K isn't a lot of money. Seriously. I know I sound like a crazy motherfucker for saying that, but it's manageable. The catch is that you need to change your lifestyle. Significantly. For the next year or two (at least until your debt becomes small enough where consolidation is possible). What does that mean? Go out to eat once every two weeks instead of once every other day. Turn off the cable. Stop buying shit you don't need. It's amazing how much money can pile up in your bank account when YOU STOP SPENDING IT.

4) Don't goto friends or family. Money creates rifts in relationships. It sucks, but it's true. They'll never tell you to your face, but it creates issues. Besides, you'll feel a HELL of a lot better about yourself when, at the end of the day, you conquered this demon on your own.

5) Most important of all, never forget this: YMMV. Every situation is different and there are a million details to your story that you've left out for various reasons. You can give us more information, or you can use what you find here and match it to your particular problem. But remember that going into debt is not a unique problem, but often requires unique solutions to fit different people.
posted by SeizeTheDay at 5:48 PM on February 22, 2007 [9 favorites has favorites]

Just in case it's not clear, closing accounts can hurt your score by increasing your utilization (what % of your available credit you are using) and by decreasing the average age of your open accounts (older accounts = better, all other things being equal), but consolidation does not imply closing accounts. So consolidation does not mean hurting your score in that sense.

Otherwise, I can't see how consolidation would hurt your score, except that you would be requesting more credit when you obtain the loan, and any attempt to obtain credit counts as a temporary black mark on your record.

Wikipedia on FICO makeup
posted by epugachev at 5:49 PM on February 22, 2007

Sorry, I may have repeated a few people above. I kinda get into "rant mode" when it comes this because I found myself in a similar situation years ago. Pick and choose what you think is useful and discard the rest.
posted by SeizeTheDay at 5:50 PM on February 22, 2007

Oh, and I think kindall is probably right about the key here being the difference between debt consolidation and credit counseling. Wikipedia on the latter:

Another common criticism of credit counseling is the assertion that participating in a Debt Management Plan will ruin a consumer’s credit. Fair Isaac Corporation, the company that pioneered the use of credit scores, states that participation in a Debt Management Plan has no effect on the FICO credit score. However it should be noted that a client active in a Debt Management Plan may have more difficulty securing a car or home loan and be denied any further unsecured credit, such as a credit card. Some lenders view a prospective customer's participation in a Debt Management Plan as indicative of the customer being unfit to manage their finances.

posted by epugachev at 5:59 PM on February 22, 2007

SeizeTheDay's comment is excellent in many regards. Heed the advice.

Also, while people are correct that your credit score will be adversely affected by closing accounts (because your utilization will go up), this is not necessarily your top priority, right? Your top priority is to get that debt paid off. And if the best way for you to do that is to close most of the accounts and consolidate the debt, then do that. Seriously. Who cares what other people think? You need to do what works for you to get out of this situation.

It's not going to kill your credit score or wreck your credit history. It will ding your score, as others have noted, but, as I said, so what? If it helps you get the debt paid off, then consolidate the accounts!

Good luck, by the way. I struggled with debt for years before finding my own way to pay it off (which was ultimately Dave Ramsey's debt snowball). March 2008, baby! That's my target.
posted by jdroth at 6:09 PM on February 22, 2007

Also, consider getting a weekend or night job to which all the money directly goes into paying off debt.

Try that for a year or 2 and you can easily make 13k!
posted by k8t at 6:38 PM on February 22, 2007

Unless you feel completely overwhelmed and are having a hard time managing payments, I wouldn't bother with a debt consolidation service. You can handle it all on your own, without paying someone else to do it or worrying about future repercussions since that seems to of concern to you. Also, unless you're in the immediate market for a major financed purchase (home, car) or you're not making payments, don't stress about your credit score right yet. Squaring away some of your debt and lowering your debt/available credit ratio is going to help.

Check out 0% 12 month APR cards with no or capped xfer fees (e.g. 3% or $75 max) Transfer balances to 0% cards, consolidating as much as you can to as few cards as you can. Don't go crazy applying for every card under the sun. Try for one that makes sense to you and once you get it, ask to up your available credit to accommodate some transfers. If you can't get everything on 0% cards, call your cc company and ask for a lower rate.
posted by jerseygirl at 6:43 PM on February 22, 2007

One thing that was helpful for me was to create a second checking account to which I put all the money that was to pay off debt. The money went into that account via direct deposit. I then set up automatic payments to each credit card.

Now it is like I have no interaction with the money at all.
posted by k8t at 7:23 PM on February 22, 2007 [1 favorite has favorites]

Then I'd attack the card with the highest interest rate while making the minimum on the others. Then take them down to zero one after another.

Actually I want to correct or clarify my above statement. You'll need to sit down and do some math to find out which card to attack first if you go this route.

Basically you're comparing interest rates versus the time it takes to pay the balance off. So you may do better paying off two 9% cards in six months rather than focusing on one 16% card (If the balances of the two lower rate cards equal or are greater than the 16%, etc.)

Again it depends on the balance, the interest rate, the time it'll take you to pay it off. Google up a interest rate calculator, start plugging your numbers in and see what you come up with.
posted by wfrgms at 7:23 PM on February 22, 2007

You've gotten lots of good advice and I just want to add one thing. You shouldn't trade unsecured debt for secured debt, even for a better interest rate, unless your circumstances have radically changed for the better. If you are unable to pay off unsecured debt, the worst thing that can happen is your credit is wrecked. If you put your house or car up for collateral and cannot pay it off, you'll lose your house or your car.
posted by BluGnu at 8:32 PM on February 22, 2007

So you may do better paying off two 9% cards in six months rather than focusing on one 16% card

Wrong. You are always better off paying the highest interest rate first, assuming that you are at least able to make the minimum payments on your other accounts so you don't get penalties.

A $13,000 credit limit on a card isn't that hard to get. Why not call your lowest interest card provider and ask them to up your credit limit and tell them you will transfer balances from all of your other cards. They should jump at the opportunity to get all of your debt. Then cut up all of your other cards. If you don't cancel them it shouldn't affect your score.

But, the heck with your FICA score, anyway. Your first priority is to simplify your life and get your finances in order.
posted by JackFlash at 8:41 PM on February 22, 2007

Consolidating is probably going to be a wash on your credit score. If you work it so you close a few accounts after consolidation so that your debt to available credit ratio hasn't changed drastically it shouldn't hurt or harm you. Just try not to close your oldest 2 accounts or so. Some article can probably tell you what the magic number is to shoot for on that debt-to-available credit%.

The main issue is that consolidating your debt is not easy to do unless you have serious collateral for Mr. Bank. Usually when you see things about consolidating it's basically a 2nd mortgage or Home Equity Loan. If you have a relationship with a bank or Credit Union there might be something.

Depending on how screwy your credit is and how much your current creditors hate you, you might sell one of them on the idea of consolidating everything on their card. But then you are at their Mercy to whatever interest rate they will charge you and whatever other terms them might throw your way. That would sorta scare me. But I guess you are at their Mercy now anyway. [and no, I'm not sure why mercy gets a capital M.]

And if you consolidate but keep accounts open for the sake of your credit score-- be sure to put those cards on ice. Cut them up, put them in the freezer, whatever it takes. Half the reason the CC industry likes balance transfers so much is that so many people transfer balances and then backslide.
posted by Mozzie at 12:12 AM on February 23, 2007

Your FICO score is nothing more than a reflection of your reliability and ability to take on more debt. Having 13k in revolving credit (no fixed payment schedule) will hurt your score more than having it in installment credit (fixed payment schedule like a traditional loan). You can get a bank to make a loan in the required amount, pay off the cards, and after a few months you should see your score go up. Trick #1: if you cancel the cards the score will go down because, from their perspective, that isn't very reliable of you, is it? Trick #2: you have to use the cards responsibly from that point on, or you'll get yourself in the same mess all over again.

I applied for the loan and was turned down due to my high revolving credit. So I appealed and said that was why I needed the loan, and they gave it to me. Don't be afraid to try. It costs nothing. I signed up for Equifax's Score Watch before I did any of this so I could see how my FICO score changed throughout the process. It's nerve racking because even a credit check will reduce your score slightly (hmm... they're taking on MORE debt?!?) and those get run when you apply for the loan (oh, they're just shifting debt to a more responsible place!).
posted by jwells at 5:17 AM on February 23, 2007

Just an anecdote about the effect of cancelling/not cancelling credit cards: About 2 years ago my husband and I both received a copy of our credit reports while applying for a bank account. Our FICO scores were within 20 points of each other. I immediately "cleaned up" my credit report by closing all accounts I don't use (about 14 credit cards from college days and various department stores, etc.). He intended to but never did close his extraneous accounts, claiming it would damage his credit.

Last week we had our credit run again for a car loan, and we have exactly the same FICO score.
posted by orangemiles at 7:41 AM on February 23, 2007

Wrong. You are always better off paying the highest interest rate first, assuming that you are at least able to make the minimum payments on your other accounts so you don't get penalties.

While I agree with you in principle, and would not personally use jdroth's favored 'debt snowball' approach, paying off debt is like exercise: the "most effective" technique is the one you use. In debt, diet, and exercise people have a tendency to hyper-focus on The Best Way To Do Things - what's going to get the most efficient and rapid result? I'm going to do that!

The problem is that in many cases people are unable to keep it up, for a variety of behavioral reasons. Jdroth needed the mental reward of seeing debts disappear entirely, not to save $100 over the life of a loan. Many people need not to get maximum benefit from lifting weights, they need to get involved in something that will keep them going back to the gym long enough to make it a habit. As much as I despise it, some people need to visibly drop a pant size through Atkins before they're prepared to make real dietary intake changes.

No matter what, miltoncat, the one thing you cannot overlook is the first rule of getting out of a hole: stop digging. If you're taking on new debt you're not reducing your debt load.

One of the big ways people do the two-forward-three-back dance with credit is by trying to move debts to new, low/no-interest accounts but end up charging back up the paid-off account. The industry knows this, and it's why they're not shy about throwing around those offers. They know that while some of their accounts will get paid off that it's a good bet the debt will be re-created and the overall trend will be towards new debt.

Stop spending money you don't have and stop thinking about your credit score. The only reason to have a good credit score is to get credit, and that's the last thing you need now.
posted by phearlez at 9:11 AM on February 23, 2007

A part time job. I have a buddy who is knocking his debt down hard and fast by putting every dime of his extra income toward unsecured debt, he's really knocking it down. As noted above, put your money toward highest interest accounts first. Using methods described above to get one company to offer you zero percent on balance transfered money.

Dependant upon your credit score and relationship with DiscoverCard, they offer (probably twice a year if you're in good standing with them) zero percent for the life of the loan, up to your full limit, with no transfer fees. It's really sweet.

It makes sense (to me) to utilize the money loaned and make minimums on the zero and one percent accounts. YMMV of course.
posted by dancestoblue at 10:08 AM on February 23, 2007

If focus is the problem, consolidation won't be your answer. You need a written budget. You have to plan, each month, where your money is to be spent -- and you have to make that plan, in writing, before you get the money.

Again, the solution to a lack of focus is a plan. It isn't the easiest thing to do, and you won't get it perfect the first time through, but you can do it.
posted by kc0dxh at 10:41 AM on February 23, 2007

There is great advice in this thread. In my experience wrestling with credit card debt, I am just now putting a sizable dent in it by transfering the bulk to a card with a very low interest for balance transfers (American Express -blue[I don't know if they are still offering a good rate])--paying roughly the minimum on that and focusing paying off my higher interest card. Almost done, phew! Keeping track of my bank accounts and credit cards online on an almost obsessive basis (every couple days) has probably been the biggest help. Oh, and I'm earning a bit more than I was and that helps considerably.
posted by fieldtrip at 6:51 PM on February 23, 2007

Thanks everyone. This is helping a lot.

I'm relatively organized (I'm OCD when it comes to cleaning!) but having to pay bill after bill each month is making me insane. Like "But I thought I paid that one!... Oh. That was X bill. This is the Y bill. The Z bill is due next week."

One thing I will do is move the bills to a paperless system. I have a desktop and a laptop, and it's much easier for me to access email/online bill payment than it is to access the stack of bills at home on my desk. I definitely need simplification.

I will sit down this weekend and work out exactly what I will do and work out what will work best for me. I think another issue is I've been trying to do what everyone else says is right. I need to discern what will work best for me and what won't make me miserable in the process! Sacrifice is OK and I'm willing to do that... living on beanie weenies and never leaving my house again, eh, not so much.

I'm female and not a big clotheshorse or shoe girl. I don't waste money on fancy drinks. It's more of just not watching my spending, and it adding up, then I'm broke before I get my next paycheck (every 2 weeks) and then I have to use the CCs to get by. Cycle repeats itself, and if I have a setback (like my cat getting sick in January and costing me $700) it's almost devastating. Not a smart way to live.
posted by miltoncat at 2:52 PM on February 24, 2007