Pay off your credit card with a loan - good idea/bad idea?
April 24, 2016 8:52 AM   Subscribe

Is it really a good idea to get one of those "Pay off your credit card" loans? I am currently swimming in credit card debt & finance charges & I'm getting sick of it. I see ads for these things on Mint but I'm skeptical. I'm just kind of afraid of getting involved in something that will just make my situation worse & more expensive. I was wondering if any real people had positive experiences with this type of product.

I only have one credit card and the balance kind of just got out of control due to some identified factors that I don't think will re-occur. I'm attempting to pay it down: I stopped using it for everyday things, I send a payment every time I use it (only when I want miles for a big purchase) and on top of that I send a re-payment payment every week. But because of the interest, the balance isn't going anywhere. I would just like to get it over with in a definable amount of time, rather than knowing it could be there forever. But I am also skeptical of something that seems too good to be true. Have you done this and did it wind up saving you money long term?

If I did do this I would probably seek out a loan from my bank or a credit union, not the ones that Mint advertises. Does that make it a better idea?
posted by bleep to Work & Money (27 answers total) 3 users marked this as a favorite
First things first, have you talked to your credit card company about lowering the interest rate on your card?
posted by phunniemee at 9:01 AM on April 24, 2016 [9 favorites]

If the interest on the loan is less than the interest on your CC, then yes, this would be a good idea, especially since interest is typically your enemy on credit cards. However, it also depends on what kind of loan you get - if you can get yourself a HELOC (if you own a home and have enough equity), then that will typically net you the lowest interest; I've seen 6mo promos for 1.99% lately, going up to ~4% thereafter.

You may be able to get a secured loan at around 6% if you have a vehicle/boat/something that you can use to secure it. Those rates are typically pretty low since you have them secured with collateral.

Unsecured loans right now are around 11% APR. Depending on your credit card's APR, this may make it a wash for you.

Part of this also depends on how long you think you'll need to pay it off... realistically, with interest rates being what they are right now, you should be dumping as much money as possible into paying this off. Another possibility would be a balance transfer to a new credit card, but ONLY if you can pay off the balance within the promotional time-frame, otherwise all that interest will just get tacked on anyway.

Good luck!
posted by Verdandi at 9:05 AM on April 24, 2016 [3 favorites]

If you're absolutely sure that you're done buying stuff on credit, then one option is transferring your balance to a 0% interest credit card and paying the balance down before the interest rate goes up. Nerd Wallet has a list of the best cards for doing this. You're basically getting a no-interest loan for a year or more... BUT, all the interest comes back if you don't pay it off by the end.

If getting another card doesn't appeal to you, then absolutely go to your bank and see what they can do. If they can offer a better interest rate than the card company can (after you take phunniemee's suggestion), then go for it.
posted by Huck500 at 9:06 AM on April 24, 2016 [16 favorites]

The loans only work if get rid of your credit cards. If you are thinking of keeping your cards & getting the loan, you will just end up with twice the debt you have now, no matter how many factors you think you have identified. There are a lot of options to access your own money via visa debit cards etc now a days so you don't need to keep the credit cards anyway once they are paid off.
posted by wwax at 9:12 AM on April 24, 2016 [5 favorites]

Response by poster: No I don't have any collateral. I looked into transferring it to a new 0% card but the balance is apparently over the limit of what they will let you transfer. I mean I can compare the interest rates between two things - I know that 15% is more than 11%, but I also know that there's always surprises that make something that seem like a good idea turn out not to be. So I was wondering if anyone had any personal experience with these products. Even if I did call and ask them to reduce the interest I don't think they'll reduce it enough to make a difference. I've been dumping as much as I possibly can into this debt for years and I'm just sick of it.
posted by bleep at 9:14 AM on April 24, 2016

My criteria would include:

1. I would be able to change the behavior/circumstances that created the card debt.

2. The loan pays off the entire debt.

3. I can handle the loan payoff.

You want a loan with the lowest interest rate and a pay off term ( 3 years, 5 years, etc.) that creates monthly payments you can afford.

If you cannot find a loan that you can pay off with monthly payments that are less than the monthly payments that would directly pay off the card debt over the same time period ( assuming you stop using the card!), then avoid the loan.

If you cannot afford anything in excess of the minimal payment your card allows, and, so, are not paying down the debt, you should ask yourself if you could afford loan payments.
posted by justcorbly at 9:16 AM on April 24, 2016

the balance is apparently over the limit of what they will let you transfer.

Well, one approach is to transfer whatever the maximum is - then you'll have two minimum payments, but you'll still have less interest overall because only one balance is subject to interest.

it sounds to me like you could really use a good basic education on debt (they really should be called "debt cards") and getting out of it. Your repayment plan sounds a little chaotic, not really a plan but treading water; and if you're making so many payments, but not paying more than your monthly interest, it's going to get worse. So you need to create a real strategy, supported by knowledge, for bailing yourself out. Dave Ramsey can be harsh but his advice is good. Suze Orman's resources have good readings about debt.

A loan can be a quick fix, but it's not a good idea unless you get a better understanding about how finance works. Among the things you need to ask are: what is the penalty for late payment? Because if you miss even one, even by a few hours after close of business, you could find yourself with an even worse deal. I'm a big believer in coming to terms with debt, understanding your money psychology, really get a handle on this situation and enduring the slower but more confidence- and knowledge-building pain of repayment. It will bring you gifts over the long haul and better position you to manage money throughout life. The loan might be a good idea, but only if you build the foundation to treat that form of credit with extreme responsibility, and develop better habits with your present access to credit. The miles aren't saving you anything if you spend even more than air travel would cost on interest. Research this! And yes, start by calling your credit card company to say you need to make a repayment agreement and you need a lower interest rate, and if they can't help you, you will seek balance transfer. Don't assume you know what they will do. In most cases they will work with you because they'd rather secure your money than watch it go to another bank, or have to sell your debt for cents on the dollar. Get started!
posted by Miko at 9:24 AM on April 24, 2016 [6 favorites]

Response by poster: I am paying way more than the minimum payment and more than enough to cover the interest. As I said above the reason for this debt has been identified and will not re-occur.
posted by bleep at 9:28 AM on April 24, 2016 [1 favorite]

I would look into CCCS (looks like it's called Transformance now) or a similar Credit Counseling service. I used it to get rid of all my debt without opening any further cards or any extra loans. You pay them, they pay the creditors in the order you specify.

You will probably not be able to continue to use the card, though - in order to lower your interest rate (part of CCCS's negotiation), you will have to agree to stop using it for purchases.
posted by getawaysticks at 9:38 AM on April 24, 2016 [5 favorites]

I did this with a loan from my credit union. The loan I was eligible for was not enough to pay off all of my credit cards, so I only paid off those with the highest interest rates. The payment was less than the minimum I was paying on my cards, and I ended up paying a lot less in interest overall. I currently have a year to go on this loan, and it's really great to have a clear end in sight. So if you are absolutely, 100% sure you will not put anything on your credit card that you can't pay off the same month, it can be a good idea. I'm glad I did it.
posted by FencingGal at 9:47 AM on April 24, 2016 [3 favorites]

You write that I am paying way more than the minimum payment and more than enough to cover the interest but also that because of the interest, the balance isn't going anywhere.

You may mean by that second part that the reduction in the balance is negligible, and you would prefer to have a loan because it would make it clear to you when the debt would be paid in full and you could see the progress ieach month. But if it's literally the case that you are paying more than enough to cover the interest, but because of the interest the balance is not decreasing, something is wrong somewhere.

Anything you pay beyond the interest should be reducing the principal, so the balance should be decreasing. If you are paying a standard amount weekly/monthly, the portion of your payment that is applied to the principal should be increasing, because the amount of interest charges every month should decrease along with the total balance.

It may be that the debt is large enough that the reduction in balance feels like it's nothing--so you are describing a psychological effect rather than a financial one. If this is the case, it might also be true that taking out a loan that wipes out that balance may make you feel like you've reduced your total debt, with the psychological effect that you feel you are free to spend more than you are currently spending.

I would make sure I consider the psychological significance of various attempts to deal with your debt along with the strictly mathematical ones, because it seems like it may be relevant to your experience.
posted by layceepee at 9:47 AM on April 24, 2016 [12 favorites]

I mean I can compare the interest rates between two things - I know that 15% is more than 11%, but I also know that there's always surprises that make something that seem like a good idea turn out not to be

The main catches to watch out for are transfer fees and insurance. Transfer fees can be pretty large and negate the gains of temporarily lowering the interest rate. They tended to be around 1.5% to 2.5% back when I was working the multi-card transfer game to manage debt. The length of the interest free period matters - 6months rather a year means your transfer fee is actually double - since you are 'buying' half as much interest free time.

Also banks will work very hard to try and sell you insurance for your loan and if you take it this can completely negate any advantageous interest rate (and it is notoriously hard to get the insurance to pay out - in the UK the banks got spanked hard for this scam and had to repay millions to their scam victims).

Always fully model out your debt payments and know the real costs of things like interest rate changes, annual card fees, transfer costs, insurance and the benefits of early payments (it is pretty motivating to see how much your total interest paid goes down if you pay off debt quicker)

The other thing to watch out for is penalty rates. Some cards have interest rates that skyrocket to double usurious rates (most cards start out already usurious) if you miss a payment. If you're likely to miss payments (and you know if you are) then favour a card with a more forgiving penalty rate since you know you will be paying that rate rather than a card with a more attractive ideal rate but harsher penalty rate.
posted by srboisvert at 9:50 AM on April 24, 2016 [4 favorites]

Pay the bill each month once when it comes, paying multiple times a month can cost you more money, since they may think you are only partially paying. My bank charged me extra in finance charges paying multiple times a month.
posted by TheAdamist at 9:51 AM on April 24, 2016

My bank charged me extra in finance charges paying multiple times a month.

If this is true, and you were actually making your full payment due each month, your bank was literally ripping you off. There's no prepayment penalty on any reputable credit cards, so as long as you paid the amount due by the due date, it should not increase your finance charges to make several smaller payments.

OP: So, when considering products like this, you should always be asking yourself what the other side intends to get out of it. You have, apparently, suboptimal credit, meaning that you are viewed as risky. Credit card debt is unsecured and dischargeable in bankruptcy. That means your default risk is unusually high. Why would anyone make a substantial loan to you? I can believe that some credit unions might regard it as part of their mission, being willing to do more intensive underwriting and having more data on you from your prior relationship. Anyone else is most likely a predator. They are tacking on large upfront fees or, worse, are banking on your not making payments and getting stuck with large late fees and/or penalty interest rates. If you're doing a home equity refi, you're taking unsecured debt and securing it against your home. My generic advice is: avoid. At best, this is something you can only do if (a) the interest being offered is substantially below the rate you're paying now on the card; (b) you have full, complete, total understanding of all the terms, including the terms concerning missed or late payments; and (c) you have actually gotten your arms around whatever led to the spending in the first place. I don't mean "oh, I think I know the problem and I hope to reform," I mean "I have successfully lived for some time under my new spending plan and I have some margin for error now." Because otherwise you're likely to blow your fingers off.
posted by praemunire at 10:03 AM on April 24, 2016 [8 favorites]

If the interest rate is favorable and I could meet the loan's monthly payments then I would do it. I would get ahold of the full agreement and read through the fine print carefully to look for the gotchas. One example: credit card balance transfers frequently have a 3 or 4 percent transaction fee, so that reduces some of the savings from the lower interest rate.
posted by duoshao at 10:42 AM on April 24, 2016

Best answer: I've done this, and it worked out great. The interest rate was fixed and the payment each month was divided over 3 years. Just read the fine print on whatever loan you pick and make sure that all of it makes sense to and for you, paying particular attention to if: 1. The rate is fixed, 2. You can afford the monthly payment, and 3. There is no pre-payment penalty meaning you can pay more or in-full before the terms of the loan, which might save you some interest in the end. I worked with Prosper. I recommend checking them out.
posted by katemcd at 11:58 AM on April 24, 2016 [1 favorite]

Best answer: Not a direct answer to your question, but relatedly...

I've been doing what Huck500 suggests (transfer bal to 0% APR deals) and being vigilant about spending so that most of my income goes to paying off the credit cards. I have them set to auto-pay so that I don't worry about accidentally missing the pay-by-date and losing the 0% deal, but I always pay a HUGE chunk on top of that at least once a month. Even with the one time balance transfer charges (1-3% of total transfer amount), I was saving hundreds every month from the 0%. I only did this because I'm confident I can pay off all of the debt before the introductory offer expires in 12-16 months. The regular APR on these cards after the intro offer, or in case of default, are ridiculous (22%+), which is enough to keep me from running up charges again.

I was in a MOUND of debt (think close to 70G) and it took several years, but I can finally see the light at the end of the tunnel. I used the snowball strategy (I think that's what it's called anyway). I also took on a little extra work in the beginning because I felt so paralyzed by seeing absolutely no dent being made in my total balance due.
posted by RaRa-SpaceRobot at 12:30 PM on April 24, 2016 [3 favorites]

Best answer: I did this in December to consolidate an existing bank loan, two credit cards and an overdraft. It has worked this time, and I'm a few months away from being totally debt-free now, but this is not the first time I have tried this and previously it did not stick - I just ran up my overdraft and cards again. This time it's sticking because I have a budget plan (YNAB! But this is also the third time I have tried to use YNAB and the first time it's stuck) and I am really super invested in getting myself out of debt this time. So yeah, it does work, but you have to be disciplined about it.
posted by corvine at 12:46 PM on April 24, 2016 [1 favorite]

And if you're wondering about legitimacy, by "Mint loans" I assume you're referring to this page which lists Prosper, LendingClub, and Discover. These are all large, regulated lenders. You'll want to read the fine print before taking on more debt, obviously, but none of these are payday/title loan-type scams if that's what you're worried about.

If you're wondering what they charge you can find the LendingClub interest table here. The "grades" they assign to borrowers are based on credit score and income.
posted by Ndwright at 1:27 PM on April 24, 2016

I am paying way more than the minimum payment and more than enough to cover the interest
because of the interest, the balance isn't going anywhere. I would just like to get it over with in a definable amount of time, rather than knowing it could be there forever
One of these statements cannot be correct. You're either paying off the interest every month plus a portion of the loan principal, thereby decreasing the balance, or you are not and the balance is growing (or staying the same) every month.

If you are decreasing the balance but not as fast as you'd like, I'd start by trying to refinance the terms with your credit card company first before talking to a third party. The institution that issued your credit card has much more of incentive to work with you than another financial institution. You have a history with them, you can prove you are working to pay off the balance, and they want you to keep you as a future customer. The CC company would also much rather have you making regular payments at a smaller APR than have you potentially discharge the balance in bankruptcy. That's why refinancing is a thing, it helps the loan issuer avoid their worst-case scenario. You can also avoid damaging your credit by taking out another loan.

I'd be highly skeptical of getting another financial institution involved in my debt. There are many opportunities for another party to take advantage of you here with transfer fees etc. The only reason I would consider this would be if I was really buried under the interest rate AND the loan issuer refused to work with me. In that case, I would start by looking at government agencies that could help broker loan refinancing before going to a third party. If I had exhausted all other options and I had calculated how much I would need to get out from under the interest rate, then I would consider another loan.

Basically, what you are proposing would be my last option before choosing bankruptcy, depending on how much debt I had. And even then, I might choose bankruptcy over potentially being stuck with even more debt if that gambit didn't work out. A bankruptcy lawyer could probably give you better advice on when to make that call, however.
posted by deathpanels at 2:26 PM on April 24, 2016 [1 favorite]

I will just chime in to say that I did this through Discover Personal Loans. I found the lady I worked with to set it all up very helpful and listed every fee that I might possibly be charged, I then read all the paperwork that came (before signing) and it all matched up with what she said. It worked for me but I never used my credit cards again really and that is the part that is hard. The loan part was easy and pretty helpful.
posted by magnetsphere at 2:51 PM on April 24, 2016

I'd also like to suggest that you ignore air miles - you shouldn't be spending enough to get significant points if you want to bring down your debt in the first place and secondly spending air miles almost always ends up costing you even more because there will be ancillary spending that goes with whatever you use the miles for. You are not getting "a deal" when you get a couple of percentage points on freshly added debt that then requires you to spend even more to cash it in. You are just getting more debt and then more debt on top that in exchange for nickels. There is a reason credit card companies offer these rewards and it isn't because they love you (it's because they get their vig no matter what and you are just going to pay them even more in interest).
posted by srboisvert at 3:47 PM on April 24, 2016 [3 favorites]

Best answer: Major Buzzkill checking in here. The problem is that you should not be using credit at all if you want to pay this off. Using it for big-ticket items is the exact opposite of what you should do. There's a lot of good advice above (I'll add that Greenpath is a good debt consolidation company) but your plan may not be drastic enough.
Many of my clients tried the consolidation but did not go to a cash basis, and just dug in deeper.

I am a bankruptcy attorney. What I look at is whether the debt can be paid off in a reasonable manner in about two years. Amortize the debt and figure out the amount of payment needed to pay off in 24 months. If you can't afford that, talk to a bankruptcy attorney in person. (We can't reliably advise you over the phone.) Very generally, I won't recommend a bankruptcy if you have less than $10,000 in debt; if your debt equals your annual gross income (or more) you're in trouble. I'm also more likely to recommend it for folks on fixed incomes like social security, pension or disability.

posted by Sweet Dee Kat at 5:47 PM on April 24, 2016 [4 favorites]

Best answer: I did this. It absolutely works provided you don't misuse the card again, and the interest rate on the loan is lower than the rate on the card. I got a personal loan from my bank with whom I had many years of good history so was able to get a low interest rate loan. Then I made absolutely sure to pay every single payment on time and I did not use the card except for things I had the cash to pay for. In other words, I only charged things I could already afford just to keep the card active. Don't use a debit card as someone suggested up thread, if your bank account gets hacked you can be cleaned out. At least with a good card if you get hacked you can dispute it and most times you won't have to pay for charges you didn't make.
posted by WalkerWestridge at 6:21 PM on April 24, 2016

Best answer: To give you some idea of how these "regulated" lenders can behave:

Discover to refund $200 million to customers for deceptive telemarketing

You have to understand that, as far as financial institutions are concerned, once you fall into a certain debt demographic you have basically branded "hapless moron" onto your forehead. Like in an old Elmer Fudd cartoon, they look at you and they see "dinner." (This is not my judgment, mind you.) So almost any financial product marketed to people in financial distress is exploitative--one of the reasons it sucks to be poor in this country. Just be very, very careful.
posted by praemunire at 6:43 PM on April 24, 2016 [3 favorites]

Best answer: I just wanted to add this if you decide to go the route of opening a new 0% balance transfer credit card: if your existing credit card is not issued by Chase (Important note: you cannot balance transfer from one credit card to another card issued by the same bank), then you may want to consider Chase Slate.

This card not only has 15 months 0% interest, it also has no balance transfer fee for the first 60 days. (Usually, 0% card offers are for 12 months with a one-time 2%-5% balance transfer fee). So, essentially the Slate is a Zero-fee loan for 15 months. The maximum transfer amount is $15,000 or up to your credit limit, whichever is lower.
posted by thewildgreen at 8:40 PM on April 24, 2016 [1 favorite]

Best answer: If I did do this I would probably seek out a loan from my bank or a credit union, not the ones that Mint advertises. Does that make it a better idea?
Yes, yes yes. Try your credit union first and if they won't approve you for an unsecured loan, ask them what you can do to improve your chances. Then do those things and try again in 6-12 months.
posted by soelo at 7:38 AM on April 25, 2016 [1 favorite]

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