Should I take out this loan to pay off high interest cards?

[Anonymous]

Hi,

Although I'm making payments on time, I have 2 credit cards with a fairly high balance.  One is capitalone and the other is with discover (discover it card).   The current balance on the capone account is about $2,900 with a $3,000 credit line and I'm paying $50 in interest.  The balance on the discover card is about $1,500 and I'm not paying any interest on the card as the balance is from a promotional balance transfer.  The APR on both cards is about 23%.  I have these 2 plus a jcpenny credit card on my credit file, that's it.  No loans except student loans on the file.  My question: I received two loan offers in the mail that promises to offer a lower interest rate than my current credit card rates but I'm weary about taking out one of these loans.  One is from Avant and the other is from Upstart.  I know it's good to have a mix of credit accounts on the credit file, but has anyone had experience with any of these two companies and what do you think about taking out a loan to pay off high interest cards?  

Thanks for your advice. 

[RobertEG]

Using a lower interest rate loan to pay off higher interest rate chredit cards clearly has several advantages.

The clear out-of-pocket $ savings can be supplemented by the credit scoring advantages of reducing revolving % util, and adding an installment loan to improve credit mix.

However, there are some potential down-sides.

First, if the entire amount of the loan is applied to the revolving debt, then there is no net increase in debt.  It can be a favorable shifting of the deck chairs from the sun into the shade.  However, the temptation often arises to siphon off a bit of the loan to buy a new trinket, which will increase your overall debt.

Second, the new loan may have short-term negative credit scoring affects associated with inquiries and with lowering your average age of accounts.

However, % util of revolving credit is a high-weighted scoring category, and reduction of % util is often worh the hit of an inquiry or a reduction in AAoA.

[Starting_Over2013]

I agree with Robert regarding the potential for a short-term negative impact, however, the hit is well worth it. I say this because I literally JUST did this same thing with my cards...but the total loan was $18,500, which all went toward paying my cards off!

I used Marcus by Goldman Sachs, which has no loan origination fee and offers very decent rates. I was extremely nervous about the entire process, but I researched Marcus and everything was legitimate with no hidden fes. Compared to the interest on the cards, I am paying much more in principal each month, and even with only making the minimum loan payment, it will be paid off in 3 years. I never would have been able to pay those cards off in that amount of time!

Also, my scores have already improved since it has been about a month and the zero balances on the cards have been reflected! 

[Anonymous]

Thanks for the advice guys. I Appreciate it. I'll look into these companies. Thanks again.

[Anonymous]

To dovetail on what RobertEG said...

There's another related risk.  Once your CC's are all paid to $0, it will be tempting -- if not immediately, then perhaps in two or three months time -- to start charging things on your cards again.  And then something will come up that will make it hard to pay them in full that month, so you'll just pay most of them off and carry a little bit over.  Then that will happen again.  And before you know it, your cards are steadily going up.  After all, there is a reason why you are in the situation you are now.  It likely had to do with a difficulty in strictly adhering to a budget, refusing to buy anything that you couldn't pay for immediately, and regularly saving for emergencies.

So the loan idea is great but only if it is coupled with a sure ironclad decision not to use your credit cards again until your installment loan is paid off (and even then to have a budget where you are spending far less than you take in).  The exception should be if you want to take them out of the shoebox once every six months to buy groceries, just as insurance against them being cancelled due to inactivity.

Otherwise you will run the risk of having a lot of CC debt and a big loan 12 months from now.

[Anonymous]

Thanks. This is all great advice. Actually, I don't plan on using the cards once I pay them off with the loan. I'm going to practice prudence when it comes to using my CCs, maybe use it only for buying a new pair of shoes now and then. Thanks!

[Starting_Over2013]

Robert & CreditGuy are both correct about card utilization after taking a loan out. I had already stopped using my cards prior to the loan, aside from using them for gas or groceries, then paying them off. I rotate the cards out when doing this, essentially to avoid account closure due to inactivity. My credit card debt increased due to employment/health issues, so it wasn't a matter of losing self control. I keep my cards in a safe at home, so they are not readily available. I only keep 1 card with me at a time for gas, emergencies, etc. I won't charge more than I can pay within a month!

[krielly]

I took out a personal loan a couple of years ago in the amount of 16K to pay off all of my CCs. Got a HUGE score increase as my utilization was previously high. Proud to say I will be making my last payment at the end of this week. Paying this loan off a full 2 years early I'm sure i could have shuffled some things around and played the balance transfer game, saving some $$, but for me I liked the thought of 1 payment per month, it simplified things, and my interest rate wasn't terrible at 9.49%.

As others have said though.........you MUST be committed to not running up your cc's again. VERY important and cannot be overstated.

I've since been able to increase the limits on many of my cards. That being said, since I consolidated, I use my cc's as if they were debit cards. I pay no interest as I PIF each and every month.  I use one to 2 a month for things like groceries, gas, household items, etc. Things that I would buy anyways. I now use them for the rewards only, not to buy time for paying for something.

It's a great feeling!!!