topic Re: What's better? Personal Loan or Keeping Credit Card Utilization High? in Credit Cards

What's better? Personal Loan or Keeping Credit Utilization High

donkort — Fri, 18 Sep 2009 18:51:57 GMT

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

donkort — Fri, 18 Sep 2009 18:54:31 GMT

Hi Everybody,

In your opinion, would it be better to take out a $10,000 personal loan, thereby lowering utilization to 25%, or to keep my 65% utilization?

Thanks for any responses.

FICO's: EQ - 703; TU - 673 (from MYFICO); EX ("plus score") - 690

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

itsjustmeibe — Fri, 18 Sep 2009 18:55:16 GMT

Depends on the interest rate to me

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

Anonymous — Fri, 18 Sep 2009 18:58:52 GMT

This is the problem.

If the reason you owe 10k is a systemic problem with handling money doing this will only create additional debt.

However if are going to do the right thing then doing BT to a personal loan for a LOWER interest rate can do amazing things but really only if you drop the util into the 1%-9%. I don't believe dropping it to 25% is all that helpful.

The reason is if you get to 1%-9% you could get a big enough FICO bump to then later apply for credit/reduce APRs, increase CL's etc.

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

donkort — Fri, 18 Sep 2009 18:59:04 GMT

I'm thinking: my total debt would rise, but my credit card utilization would become less. How would one's FICO score be affected? I would guess that going from 65% to 25% utilization would raise it, while my total debt wouldn't lower it as much as it was raised. Please, absolutely, correct me if I'm wrong.

I believe the interest rates would be slightly lower with the loan than with the credit card debt.

Thank you for your responses.

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

donkort — Fri, 18 Sep 2009 19:00:53 GMT

Most of my credit card debt was caused by income tax problems,.

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

Anonymous — Fri, 18 Sep 2009 19:03:05 GMT

Your total debt should NOT be increasing.

If you owe 20k on a 20k card and you put 10k of it on a personal loan you still owe 20k.. .Just 10k to two different people

The personal loan doesn't factor into utilization though so you would (in this example) drop from 100% to 50% even though you still owe the same money.

Your fico would likely go up but I can't say by how much. My utilization is 27% and that is the #2 reason my score is what it is. the #1 reason is because i have aa single settlement still reporting.

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

Anonymous — Fri, 18 Sep 2009 19:05:56 GMT

Making this move will significantly increase your FICO scores. If the APR's make sense, do it!

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

donkort — Fri, 18 Sep 2009 19:10:01 GMT

Truthfully, in essence, I'm from the "old school" when it comes to debt. I feel lousy about having so much debt. But, (perhaps alas), I'm also thinking practically--I want to raise all my FICO scores to over 700 because I'm applying for a mortgage, and I'm past the appraisal stage and into the underwriting phase. My original mid-score was 715--it's down to 690 now. I'm a bit worried that my interest rates might rise--or perhaps I might even be declined. In case I am declined, I want to raise my mid-score to over 700 while applying for a new mortgage.

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

Anonymous — Fri, 18 Sep 2009 19:16:57 GMT

What's the APR story? Why isn't this done yet? It's going to take a while to report ya know.

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

donkort — Fri, 18 Sep 2009 19:18:22 GMT

LOL....I just thought of it just now.

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

haulingthescoreup — Sat, 19 Sep 2009 00:36:00 GMT

This makes sense from the scoring side, because installment util is NOT included with revolving util. It's calculated separately, and it doesn't carry nearly the weight that revolving util does. Otherwise, we'd all be crippled by the first 6 months on a car loan, or the first 10 years on a mortgage. If you want to understand the change in your util from doing this, do your calculations based only at the balances and credit limits on CC's and lines of credit with CL's under $25-30K.

So, for scoring purposes, yes, moving revolving debt to installment debt is good for your scores.

Now for the financial angle: if the APR on the loan is lower than the APR on the CC's, you will save money, IF you pay the debt down briskly. If you're putting CC debt onto a home equity loan and paying it off over 20 years, you're going to pay a ton more interest.

So, for financial purposes, if the APR on the loan is lower than that on the cards, and if you're paying the debt down fast, this is good for your wallet.

Now for the real world: in general, the question for those contemplating this is, how did you get into trouble in the first place? There are the (we hope) one-time disasters: uninsured medical debt, divorce, unemployment, unexpected financial surprises, the IRS. Those whose credit burdens are solely from this category are good risks for debt-consolidation loans. Then there is debt that is resulting from not-so-smart decisions: high CC debt due to some psychic need to have lots of Stuff; a wish for a fancy car; an inner need for granite countertops when you can barely afford toilet paper. These people are not good candidates for debt-consolidation loans, because there's an excellent chance that whatever made them run up bills in the first place is still there, waiting for the availability of even more credit. Finally, there is the hybrid: those who were a bit undisciplined with their credit usage, and were just barely staying on top of things, and disaster hits. For this group, I wouldn't begin to predict.

In the end, it boils down to whether one has the determination to never, ever become enslaved to a lender again (with the possible exceptions of mortgages, auto loans, and student loans.) I absolutely believe in the power and the ability of people to change old habits and start new ones, but I am also very aware of how very, very difficult this is to do, and how rare it is to do successfully.

OP, you appear to be a debt-allergic person who got cross-wise with the IRS and got burned in the process. If this is so, then I put you in the first group: you are at low risk for using a debt-consolidation loan. Pull out your bank records, figure how much you can afford to pay every month, add at least 10% to that, figure again what you'll have to cut to get that extra 10%, and then go for it.

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

donkort — Sat, 19 Sep 2009 00:57:42 GMT

Thanks for all the advice.

Another thought: would an underwritter frown upon this move? I'm in the process of applying for a $95,000 mortgage on a $195,000 co-op (in other words. with an LTV slightly below 50%). It's past the appraisal stage--just about to be sent to the underwriter for final approval.

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

haulingthescoreup — Sat, 19 Sep 2009 01:47:11 GMT

Oh, Lordy, Lordy, don't do anything now, without running it by your lender!

In general, you don't want to do anything at all, whatsoever, in the credit department when you're going for a mortgage, especially this dramatic of a move, and at this late stage.

If your mortgage rate (and approval) is contingent on FICO scores, then MAYBE this would help you. It also might hurt you, by suddenly throwing up a new account right at closing.

I would consult your lender and anyone else from the lending side who is involved in your mortgage app.

If moving the debt over to installment wouldn't lower your mortgage APR or improve your chances of getting the mortgage, period, I would wait until the mortgage was down, locked, and funded before messing around with my debt.

Re: What's better? Personal Loan or Keeping Credit Card Utilization High?

Anonymous — Sat, 19 Sep 2009 04:40:47 GMT

@donkort wrote:
Thanks for all the advice.

Another thought: would an underwritter frown upon this move? I'm in the process of applying for a $95,000 mortgage on a $195,000 co-op (in other words. with an LTV slightly below 50%). It's past the appraisal stage--just about to be sent to the underwriter for final approval.

Worse yet this is not a mortgage! A mortgage is a loan secured by real estate. This is a coop loan. A coop loan is secured by shares issued to you reflecting your equity in the entirety of the coop's real estate. Coop loans are a lot trickier than mortgages. Don't mess around while engaged in the process of obtaining a coop loan without the approval of your lender. Have you been approved by the coop board yet? They may want to look at your financials, too!