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New Member
lifeisgood477
Posts: 2
Registered: ‎05-25-2011

Transfering debt from CC to an Installment Loan, implications?

I am about to finish 11 years of medical training in the next 2 months, my income will jump about 3-4 fold at first and increase by 15-20% a year for the next 4 years. To get here however, I have accumulated around 40k in credit card debt for about 85% utilization. All of these cards have high interest rates, as much as 19.99%. I also have 120k in student loan debt (consolidated at <4%), 120k in mortgage and 30k on HELOC (on a property that is worth about 180k which we are currently renting out but will be moving back when I start my new job), and 40k in auto loans. Most/all of that was done when I was younger and dumber and I haven't been able to climb out of the mess I created although the 85% utilization represents an improvement from the 100% it was at one point.

 

Aside from the high utilization levels, my credit is good with no other negatives. Reasonable age on accounts, auto loans both active and paid off, a mortgage, student loans, etc. Scores are around 710 or so, though I just had to eat 3 inquiries yesterday to start new utility service. The credit score estimators say that they would be in mid/high 700's if I paid all my CC debt off.

 

I am paying around $1100 in minimum payments per month, adding in extra as I can to gradually reduce debt. That amount can increase significantly when income increases, but have a fair number of other things that I will need to address in the next year such as an uncertain job situation with my spouse (who makes ~70k), an aging HVAC, some unpaid 2010 income taxes, moving expenses, and most importantly a house that will be too small for our growing family by early next year. I'm not having 2 children in a 2 bedroom house so I can pay off debt quicker...

 

I can move ALL of my CC debt to a 8 year installment loan at about 10% APR (with no prepayment penalty). Payment on this would be $600 a month.

 

The impact of this should be the following, correct?

 

1) Significant boost in credit score due to reduction in utilization (this is important, as I need to move out of our current 2 bedroom home that we own within the next 6-9 months due to an expanding family)

2) Reduction in minimum monthly payment by half (thus also improving DTI ratios for mortgage consideration) with retaining the ability to pay more as needed.

3) Small penalty to score for opening new credit account which should go away after ~6 months

 

Seems like a no brainer? Something I'm missing?

Moderator Emeritus
beamMEup
Posts: 4,473
Registered: ‎12-31-2008

Re: Transfering debt from CC to an Installment Loan, implications?


lifeisgood477 wrote:

2) Reduction in minimum monthly payment by half (thus also improving DTI ratios for mortgage consideration) with retaining the ability to pay more as needed.



Hey lifeisgood!

 

Welcome!  Congrats on completing 11 years!  Whoa!

 

I like the idea of taking that debt off high APR credit cards and placing it on an installment.  IMO (and you didn't ask for this, I'm just popping it in, sorry)  - I would consider continuing to pay the $1100 per month you are currently paying for this debt.  Pull out an excel spreadsheet or online loan calculator and look at the interest.  You're saving a boatload by getting it off the CC's; but it'll still be pretty dang high.  Change out your monthly payments to the $1100 and see how much you can save - and you've already got the $1100 in the budget.  Those kids are going to cost even more as they get older - so it won't be any easier to pay it off later than now.  :smileywink:

 

You'll get lots of other helpful insights into your questions from our savvy forum members.  Best wishes to you!

Just puttin' syrup on something, don't make it pancakes.
New Member
lifeisgood477
Posts: 2
Registered: ‎05-25-2011

Transfering debt from CC to an Installment Loan, implications?

The goal would be to pay it off far sooner than 8 years, I would most likely pay more than the amount I'm paying now but it would be nice to have some flexibility at first to take care of some of the deferred expenses we're accumulating like the HVAC, new carpet, moving, etc. If my wife keeps working, this will be less of an issue, but if she decides to stop after the second baby things will be tighter although still a significant increase over our current combined income. The main reasons I'd be doing this are (in priority)

 

1) Increase credit score by dropping CC utilization from 85-90% to (near) zero, some of the accounts are joint with my wife so her score should improve too.

2) Improving DTI ratio for mortgage qualification purposes (this is a bit tight if we just use my income since we'll likely keep current house as a rental property as its profitable, rents for a few hundred more than the mortgage is).

3) Saving on interest while paying down cards.

4) Lower the minimum payment we absoutely have to pay (just in case)

 

If we put all our extra income to CC payments, we could eliminate the debt in 6-8 months or so, but I'm realistic enough to know that won't be possible with the life changes we will encounter. Our lifestyle isn't going to change too much... our cars are fine, we'll keep shopping at Target and Old Navy, etc... but we do need a new house sometime soon.


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