Loan vs Credit Card for Debt Consolidation

[Anonymous]

Is a loan or credit card better for debt consolidation?

Would you open a new loan to pay off your credit cards?  or

Would you use a high credit limit credit card and perform a balance transfer?

What would be the factors of lowering your FICO score?

If using the CC, the balance you transfer is too close to the credit limit.

If using Unsecured loan, its considered opening a new acct.

Which would negatively affect your FICO score the most?

[Anonymous]

Loan is a new account. Will also effect average age. However loans are good for scores after 12 months. High balances on credit cards hit score far far far harder. But high balances on credit cards are not new accounts and score completely rebounds after paid and no inquiry!

Consolidation loans are bad for credit and should be avoided unless desperate. Regular unsecured loans are ok. However I prefer balance transfers because I can ask for lower rates than a loan and it is just simple.

If you expect to keep a high credit card balance 9 months or greater then a loan is the way to go. Maxed out credit cards can drop scores more than -100 points. A loan should should be around -30 with inq.

Message Edited by ilovepizza on 10-11-2007 04:44 PM

[Anonymous]

But if you have high balances you might not be able to get a personal loan. They might only give you credit for a consolidation loan. Then you have to decide what is best for you. Some people would rather take the extra short term point loss and put the balance on credit cards than have a consolidation loan on their cr. The problem with these loans are, they make people look like they let their debt get out of control. However for many consolidation loans are the only thing that can save them from failing to pay. So for some I definitely recommend it. You can decide what is best course of action with this information.

[Anonymous]

I'll give you my personal experience. I had $7K in credit card debt that I needed to get paid down. Interest rates on my CC's were around 18%, way too high. I went to my local bank and applied for a personal loan to pay them off. My credit score dropped 3-4 points for an inquiry, but when my revolving balances (credit cards) dropped to zero, my score went up over 80 points! And actually when my personal loan showed up on my report, my score went UP by 4 points. So for me, a new loan did not drop by scores by 30 points as mentioned above. Transferring your CC debt to another card with a low balance transfer interest rate would not bring down your CC utilization, thus not raising your credit score. But you'll probably get a better interest rate than a personal loan. So you need to decide which is more important, saving money with a lower interest rate with a balance transfer to another card; or raising your credit score by going with a personal loan.

[Anonymous]

Both methods mentioned will work ONLY if you don't run the CC debt back up.

[Anonymous]

Thanks guys.  It looks like I may be leaning towards the loan.  Although the finance charges are way higher on the loans than the credit card offers atleast its at a fixed rate and fixed time period.  It will be over and done with.

And yes, my goal is to lay off the credit cards, like you said otherwise its useless.  Thanks again.

If there is anymore insight feel free to update this thread.

[Anonymous]

Why would you use a loan at a higher finance rate to pay off credit cards? You have to keep in mind that a fico score is not a goal. The money you'll save with a higher score is what it is all about.

[Anonymous]

The loan just seems more aggressive. Since it is a payment you have to make every month and it will be over within a fixed period of time.

Although the CC has these 4.99% Fixed rate, balance transfer fee is 3%.  You have already paid them interest that you believe you are saving with transfer fee.  CC allows you to pay a minimum amount.  So in other words although the CC provides a lower interest rate, its not a guaranteed pay off in 3 years.  The loan, you have no choice in paying it off in 3 years, its a fixed rate, fixed amount of time.

A loan seems have more of a fixed rate, I could be wrong. When you do the calculations for a fixed credit card, its really not fixed.  I believe its compounded interest.

Correct me if I'm wrong.

[Anonymous]

It's an amotized loan - use the calculator here http://www.webmath.com/amort.html

Compunding is when you get paid interest on the interst that you have already earned.

[Anonymous]

Even though you are allowed to pay a lesser amount on your CC, you don't have to do it. Paying only the minimums is what usually gets people in trouble. You also don't have to stick to the minimum payments of the loan (usually)

Some cards allow for BT's without fees. some have capped fees. (A 100$ fee is easily worthwhile with lower interest. Even with an uncapped fee, you may still come out ahead with the lower interest, you can easily calculate it.

Loans as well as credit cards compound daily I believe

If you have to rely upon the forced higher payment of the loan to pay it off, then frankly, you need to work on your discipline.