How should I consolidate my credit card debt? What about a signature loan?
January 27, 2005 4:58 PM   Subscribe

FinancialFilter. I'm looking to consolidate credit card debt and am not sure what my options are. Advice?

I owe about $13,000 on four credit cards (14.9% - 19.9% APR), and about $35,000 on a consolidated student loan (4.5% APR). I've had a checking account with my current bank for over four years, but no savings account. I'm employed full-time, would be willing to close all but one of my credit card accounts when paid off, and although I don't know what my credit rating is, I know it's got to be pretty good. Oh, and I'm female, over thirty, if that matters.

What kind of APR could I expect from a signature loan? Is a signature loan a good idea? Should I leave my student loan as is?
posted by anonymous to Work & Money (11 answers total)
You should probably leave the student loan where it is. In addition to the low interest rate, a lot of student loans have *very* lenient repayment policies (forbearance, deferment and all that jazz)
posted by alan at 5:59 PM on January 27, 2005

I don't know what my credit rating is, I know it's got to be pretty good.

This is not meant as snark in the least, but if you have a pretty good credit score, then you shouldn't be paying 14.9-19.9% APR on your cards. I was paying in the upper reaches of that range only after I almost ruined my credit rating. Several years later, I'm paying much less interest (on much less debt).

So before you do anything else, get your credit score and your credit report from all three major agencies. You need to know exactly what's in there and make sure it's correct before you start shopping for a loan (and potentially get turned down because of a black mark against you that you're not even aware of). If your credit rating really is good, you could apply for a single new, lower interest credit card (I'd aim for no higher than 9.9%, and ideally 7.9% or lower if you can get it) in order to transfer all (or at least some) of your balances. Intro offers often run 0% for six months or more on balance transfers as well.

The other way to pay down credit debt if you can't consolidate it at a lower rate is to take the card with the highest interest rate (and/or highest balance), CUT IT UP, and pay off as much as you can every month (while still making at least slightly more than the minimum payment on your other cards). When that card's paid off, congratulate yourself and start in on the next one.

4.5% on the student loans isn't bad. Personally, I'd leave them as they are (even though you've got a higher balance) till you get rid of the credit card debt.

(I Am Not A Credit Counselor, though I have rebuilt my own credit. Oh, and as one female over 30 speaking to another, I'd strongly recommend that unless you have some other means to access cash in the face of some sort of financial setback, please set up a savings account and start socking money away in there too -- even if it's just 100 bucks a month.)
posted by scody at 6:03 PM on January 27, 2005

Oh, and I meant to add as well: if your credit rating's good and you've been a good customer to your credit card companies, you can also try to negotiate a lower rate. But don't accept just one or two points off (and don't fall for their ruse of "we can't give you a lower rate at this time, but we can expand your credit limit!") -- ask the 14.9% card, for example, to match or beat 9.9%.
posted by scody at 6:06 PM on January 27, 2005

ask the 14.9% card, for example, to match or beat 9.9%.

Everything scody said, except ASK THEM TO BEAT IT. If you let them know that matching it is acceptable, that's the best you can hope to get. Take an aggressive negotiating posture, and if they claim they can't bring the rate down as far as you want, don't believe it. Keep escalating to a supervisor until you get what you want or reach a conclusive no.
posted by nakedcodemonkey at 6:31 PM on January 27, 2005

If you can't get the credit card companies to lower your rates, check into Consumer Credit Counseling or another non-profit credit counseling service. They can negotiate much lower rates than you are currently paying.
posted by Doohickie at 6:47 PM on January 27, 2005

We just got a 0% one year credit card with $14k limit to take up our $5k of credit card debt. Maybe you could stick one of the cards in a zero percent intro offer and try to pay it off in a year. See earlier thread for tips on how to do this (I guess you could click on my id and look at past questions).
posted by mecran01 at 6:49 PM on January 27, 2005

Definitely leave the student loan alone, for above reasons. Another option is to trot down to your local bank and ask for a consolidation loan. Often times your local bank will give you a far better rate than the credit card companies. The downside of that better rate is that you must often give them some collateral, such as co-signing your vehicle (if you own it). But IMO that will make it feel more real and give you ample motivation to pay it off.

One note about the 0% Credit Card "offers", pay real attention to the fine print- there is often a balance transfer fee which applies. If there's no balance transfer fee then be absolutely sure to always pay the minimum balance each month. DO NOT MISS THIS. Even once. It's quite likely that if you miss a payment you technically break the contract and they can jack up the rates to higher percentages.
posted by jeremias at 8:14 PM on January 27, 2005

Not only can they (and they will) jack up your rates if you miss a payment on that card, they can often jack up the rates if you miss a payment on any card.

Be very, very wary.
posted by cosmonaught at 7:03 AM on January 28, 2005

Be careful about consolidating all of your credit card debt onto one card as it may negatively affect your credit rating. When applying for other loans or credit, underwriters will look to see what percentage of debt you have versus your available credit on each card. So if you move all of your debt to one card, you increase the percentage on that one card, and that becomes a problem.

Your best bet is to negotiate your current rates with your current cards. Even if you have a large balance, if you have been paying the minimum monthly payments on time and you have a decent credit score, then they will likely lower your APR. Call the regular customer service department and ask to negotiate your rate.

BTW, if your credit score is 650+, then you are in a good bargaining position and should get something between 7-9.99%. They may add in a 6-month 0% deal as well, but as mentioned above, read the literature very carefully before acting. Do not allow them to perform a transfer over the phone for you - ask for the offer to be mailed instead.

Regarding savings: most* financial advisors suggest that you pay yourself first from each paycheck you receive and then pay bills and other expenses. The typical percentage suggested is 10% off the top. If your bank offers the service, set up an automatic transfer from your checking to your savings each month. If they don't offer the service, then do it yourself through online banking or some other method to ensure you are socking away some money for yourself. This is especially important if you do not have any unemployment insurance protection set up to handle your debt should you be unable to work due to injury, etc.

Also, get a program like Quicken or something similar to handle your finances. There are a lot of features that might help you (budget, paying off debt, saving for a home, etc). Good luck!!

*most = in my experience
posted by cyniczny at 8:37 AM on January 28, 2005

Oh, and of course, I forgot to answer your direct questions!

Forget about the signature loan. It's likely to be terms that are less flexible than keeping your credit card debt where it is now. If you own a home, you can take a HELOC that should run you prime or slightly higher (currently 5.25%) with an application fee of around $100 or so. Plus, the interest may be a tax write-off! (I am not a tax advisor, etc.)

Your student loans seem to be at a decent rate now, and again, as mentioned above, are far more flexible for payments and deferrals than a bank loan.
posted by cyniczny at 8:44 AM on January 28, 2005

I'm employed full-time, would be willing to close all but one of my credit card accounts when paid off...

Beware of canceling credit cards. This was discussed in another AskMe thread about credit cards, but I can't seem to find it now.
posted by DakotaPaul at 4:58 PM on January 28, 2005

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