topic Re: Debt Consolidation Advice in Personal Finance

Debt Consolidation Advice

credit8502020 — Thu, 24 Sep 2020 21:57:13 GMT

Hi All! I'm helping a family member determine options for the best way to pay down debt. Please see the details below and share any feedback about what other options they may have to best eliminate as much debt as possible and as quickly as possible. Is there another bank or company that you suggest that may offer a better option?

Instead of closing the accounts, she is going to pay those down, which of course will drastically improve her credit score and pay down the loan as soon as possible.

Thanks!

Wells Fargo

IR = 18.15%
Balance = $4,163
Credit Limit = $4,100
Monthly Pymt = $159

Best Buy

IR - 25.24%
Balance = $2,551
Credit Limit = $2550
Mthly Pymt= $80

Walmart

IR = 22.90%
Balance = $800
Credit Limit = $800
Mthly Pymt = $28

Total Mthly Pymt = $267
Total Credit Card Debt = $7514

She is considering taking out a loan with her credit union:
Loan

IR - 15.49%
5 yrs.
$8,000
Mthly Pymt = 206

EQ Score - 609

Re: Debt Consolidation Advice

tcbofade — Thu, 24 Sep 2020 21:49:33 GMT

You didn't tell us the limits on the cards... therefore, we don't know her utilization...

With the information provided, 15.49% isn't the best rate for a personal loan, but it might be the best they'll get with a 609 score, and it is certainly better than their existing interest rates.

I would suggest taking the loan and paying off the cards.

Good luck!

Re: Debt Consolidation Advice

credit8502020 — Thu, 24 Sep 2020 21:58:32 GMT

@tcbofade wrote:
You didn't tell us the limits on the cards... therefore, we don't know her utilization...

With the information provided, 15.49% isn't the best rate for a personal loan, but it might be the best they'll get with a 609 score, and it is certainly better than their existing interest rates.

I would suggest taking the loan and paying off the cards.

Good luck!

@tcbofade Thank you for your feedback! I updated the post with the limits.

Re: Debt Consolidation Advice

CYBERSAM — Thu, 24 Sep 2020 22:10:02 GMT

That is actually excellent IF she can get that loan. By moving revolving balance to a loan her FICO score is going to improve significantly, then once everything is reported she can get a NEW loan in about couple of months for very low interest rate and payoff the high INT one. 👍👍

Re: Debt Consolidation Advice

Slabenstein — Fri, 25 Sep 2020 00:04:11 GMT

Agree that she should probably take the loan if approved, given the lower rate and benefit to util scoring. They could check w/ other local credit unions and see if they offer a lower rate for a 609 score, but a debt consolidation loan is, imo, a very good option to tackle this. Two important caveats, tho:

1) Because debt consolidation loans free up your revolving trade lines, it can be easy to get yourself into worse trouble than you started with if you start running up your cards again before the debt is paid off. So, ideally, your family member will want to have a budget to keep expenses within income and a card use plan that doesn't add more debt (strict transacting or sock drawering) in place before signing the loan. If they do and stick with it, the loan should definitely help them clear their debt.

2) Make sure the loan doesn't have any prepayment or early payoff penalties. That way, if they have extra funds they can put them towards paying down the loan and clearing it sooner than 5 years.

Re: Debt Consolidation Advice

credit8502020 — Fri, 25 Sep 2020 00:35:55 GMT

@CYBERSAM wrote:
That is actually excellent IF she can get that loan. By moving revolving balance to a loan her FICO score is going to improve significantly, then once everything is reported she can get a NEW loan in about couple of months for very low interest rate and payoff the high INT one. 👍👍

Thank you for the feedback! @CYBERSAM

Re: Debt Consolidation Advice

credit8502020 — Fri, 25 Sep 2020 00:38:24 GMT

@Slabenstein wrote:
Agree that she should probably take the loan if approved, given the lower rate and benefit to util scoring. They could check w/ other local credit unions and see if they offer a lower rate for a 609 score, but a debt consolidation loan is, imo, a very good option to tackle this. Two important caveats, tho:

1) Because debt consolidation loans free up your revolving trade lines, it can be easy to get yourself into worse trouble than you started with if you start running up your cards again before the debt is paid off. So, ideally, your family member will want to have a budget to keep expenses within income and a card use plan that doesn't add more debt (strict transacting or sock drawering) in place before signing the loan. If they do and stick with it, the loan should definitely help them clear their debt.

2) Make sure the loan doesn't have any prepayment or early payoff penalties. That way, if they have extra funds they can put them towards paying down the loan and clearing it sooner than 5 years.

Great points! I will definitely pass this along to them. We defintely talked about the first one because that is how they got here. So I'm going to reiterate it through you. I'm glad you mentioned the second because they planned to pay it off sooner than 5 yrs. Thank you! @Slabenstein

Re: Debt Consolidation Advice

tcbofade — Fri, 25 Sep 2020 00:40:31 GMT

@CYBERSAM wrote:
That is actually excellent IF she can get that loan. By moving revolving balance to a loan her FICO score is going to improve significantly, then once everything is reported she can get a NEW loan in about couple of months for very low interest rate and payoff the high INT one. 👍👍

^ This.

times 100

Good luck!

Re: Debt Consolidation Advice

credit8502020 — Fri, 25 Sep 2020 00:54:11 GMT

@tcbofade wrote:
@CYBERSAM wrote:
That is actually excellent IF she can get that loan. By moving revolving balance to a loan her FICO score is going to improve significantly, then once everything is reported she can get a NEW loan in about couple of months for very low interest rate and payoff the high INT one. 👍👍
^ This.

times 100

Good luck!

Thank you! @tcbofade They initially offered her to close the accounts and I told her not to because that would hurt her credit for many reasons. I'm looking forward to the boost they are going to get in their scores and how they will be able to improve their credit profile overall and get out of and stay out of harmful debt!

Re: Debt Consolidation Advice

Slabenstein — Fri, 25 Sep 2020 01:02:32 GMT

@credit8502020 wrote:
@tcbofade wrote:
@CYBERSAM wrote:
That is actually excellent IF she can get that loan. By moving revolving balance to a loan her FICO score is going to improve significantly, then once everything is reported she can get a NEW loan in about couple of months for very low interest rate and payoff the high INT one. 👍👍
^ This.

times 100

Good luck!
Thank you! @tcbofade They initially offered her to close the accounts and I told her not to because that would hurt her credit for many reasons. I'm looking forward to the boost they are going to get in their scores and how they will be able to improve their credit profile overall and get out of and stay out of harmful debt!

They likely suggested closing the cards so the loan would be her only outstanding uns debt. Every person they suggest that to and actually does it is one fewer person they lend to that can get into the situation I talked about in 1) above. It's a soft way of trying to manage the risk on these loans; they're just watching their bottom line. As long as your family member can stay out of further credit card debt, keeping the cards open should be better for her score. It's also an opportunity to learn responsible card use, though getting a handle on finances should be the first priority.

Re: Debt Consolidation Advice

credit8502020 — Fri, 25 Sep 2020 01:35:23 GMT

@Slabenstein wrote:
@credit8502020 wrote:
@tcbofade wrote:
@CYBERSAM wrote:
That is actually excellent IF she can get that loan. By moving revolving balance to a loan her FICO score is going to improve significantly, then once everything is reported she can get a NEW loan in about couple of months for very low interest rate and payoff the high INT one. 👍👍
^ This.

times 100

Good luck!
Thank you! @tcbofade They initially offered her to close the accounts and I told her not to because that would hurt her credit for many reasons. I'm looking forward to the boost they are going to get in their scores and how they will be able to improve their credit profile overall and get out of and stay out of harmful debt!
They likely suggested closing the cards so the loan would be her only outstanding uns debt. Every person they suggest that to and actually does it is one fewer person they lend to that can get into the situation I talked about in 1) above. It's a soft way of trying to manage the risk on these loans; they're just watching their bottom line. As long as your family member can stay out of further credit card debt, keeping the cards open should be better for her score. It's also an opportunity to learn responsible card use, though getting a handle on finances should be the first priority.

It's definitely a learning experience for them throughout this process. I'm looking forward to the progress that will be made.