Is a Consolidation Loan a Good Idea?

[Twotimesacharm]

I have no idea if this is the right forum or not, but it seemed like the best option for my inquiry!

Now that my credit is on track, it's time to look at my husband. We are looking to purchase a house in the next 2-3 years. He has about $45k in cc debt over 3 cards (he has others at less than 10%). The interest is high and we would like to reduce the payments. He has no lates and is score across all 3 bureaus is about 700. My questions are:

1. Will his current cc's see that as a red flag and close his accounts? They are prime cards with high limits we don't want to lose.

2. Since we will stop using the cards (except minimally to make sure they stay active) and hope to make a significant dent in the loan (if not the full balance) by the time we house hunt, will a bank look down on the fact we obtained the loan? 

3. How are the loans reported on his report? Will it be obvious to his other banks he took out a loan to pay them off based on the timing?

4. Are there consolidation loans that allow us to pay them directly instead of coming from a third party?

5. Is this a terrible idea?

Thank you in advance. This community was instrumental for my credit and I will forever be grateful, I'm hoping it will help him!

[FicoMike0]

First of all congratulations on the progress you've made!

Next, anything that gets him out of paying cc interest rates is good. You don't say what his utilization are. Getting them down can only help his scores. A consolideation or personal loan at a reasonable rate should help pay the debt down faster. The balance on an installment loan doesn't have near the negative effect that high revolving utilization does.

it's unlikely that moving cc debt to a loan would cause adverse account action, unless he starts running the card balance up again. 

As far as mortgage shopping goes, the general advice is to have no new activity 12 months prior. No new accounts of any kind, no hard inquiries. 

You're well ahead of that 12 months.

[AndySoCal]

Yes it is a good idea. I would advise using a credit union most likely you will get better rates. Here are some examples there are more. For type of loan you may want to talk to a person or by phone to have your questions and concerns answered.

Here is an article on the debt consolidation loan. The article lists some credit unions that do offer this type of loan take the rates with a grain of salt not sure when it was written

https://www.debt.org/consolidation/credit-unions/ 

I found these by searching credit union debt consolidation loan you can change the search to get better results based on where you live

https://www.penfed.org/personal-loans/

https://servicecu.org/borrow/personal-loan/ 

https://www.truliantfcu.org/borrow/debt-consolidation 

Take your time and do some research and make the best informed decision.

[Twotimesacharm]

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@FicoMike0 wrote:

First of all congratulations on the progress you've made!

Next, anything that gets him out of paying cc interest rates is good. You don't say what his utilization are. Getting them down can only help his scores. A consolideation or personal loan at a reasonable rate should help pay the debt down faster. The balance on an installment loan doesn't have near the negative effect that high revolving utilization does.

it's unlikely that moving cc debt to a loan would cause adverse account action, unless he starts running the card balance up again. 

As far as mortgage shopping goes, the general advice is to have no new activity 12 months prior. No new accounts of any kind, no hard inquiries. 

You're well ahead of that 12 months.

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Thank you for your reply and thank you for congratulations! It was a long journey to mid-high 7's but very much worth it.

As far as his utilization, on 3 cards he hasn'tused as much, the utilization is about 15-20% across those. For the 3 high ones, I'd venture to guess more like 85-90%. We rebuilt our house after fire and the insurance didn't cover the entire cost, so a lot went on the cards. Right now the monthly payments are approximately $1500 over all of them. I'm hoping the loan would reduce that by a lot!

[Twotimesacharm]

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@AndySoCal wrote:

Yes it is a good idea. I would advise using a credit union most likely you will get better rates. Here are some examples there are more. For type of loan you may want to talk to a person or by phone to have your questions and concerns answered.

Here is an article on the debt consolidation loan. The article lists some credit unions that do offer this type of loan take the rates with a grain of salt not sure when it was written

https://www.debt.org/consolidation/credit-unions/ 

I found these by searching credit union debt consolidation loan you can change the search to get better results based on where you live

https://www.penfed.org/personal-loans/

https://servicecu.org/borrow/personal-loan/ 

https://www.truliantfcu.org/borrow/debt-consolidation 

Take your time and do some research and make the best informed decision.

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Thank you for the links, I will definitely go over each of them. We are members of NFCU and we currently have only 3 months left on a 25k car loan (60 month loan, never late). I think we could pay the balance off early and then apply. It's $518/mo so that would give us breathing room for the consolidation loan payment. I will research the different banks and see what is the best fit. If NFCU has a good one, it might be best we try with there. We have many positive accounts with them. If we do try with them, will our payoff of our current loan be taken into consideration even if it hasn't hit his credit report yet? 

[AndySoCal]

@Twotimesacharm  Since you are already members of NFCU it would be a good place to start. NFCU offers debt consolidation loans.

https://www.navyfederal.org/loans-cards/personal-loans.html 

First a disclaimer I am biased towards credit unions over banks. A simple reason is this the links that I have provided a credit union will tell you the best rate is ... depending on credit worthiness it may be a higher rate then their best rate. Credit unions are member focused. A phrase you will find on some credit unions web site is people before profits. I have most of my savings in credit unions and Vanguard not banks. 

One thought on the debt consolidation loan is you would be paying lets say 10% interest on the debt not the  20 to 30 percent interest rate. This would give you some breathing room. My understanding is on this type of loan and I could be wrong is the proceeds of the loan goes to pay the credit cards off. The lender may want those accounts closed. That aspect of the loan is something to ask NFCU what they say goes not what I think. If you calculate the difference the two rates it will give you an idea. Again research it so when your ready to make the decision you have all the information and there are no surprises.

[Twotimesacharm]

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@AndySoCal wrote:

@Twotimesacharm  Since you are already members of NFCU it would be a good place to start. NFCU offers debt consolidation loans.

https://www.navyfederal.org/loans-cards/personal-loans.html 

First a disclaimer I am biased towards credit unions over banks. A simple reason is this the links that I have provided a credit union will tell you the best rate is ... depending on credit worthiness it may be a higher rate then their best rate. Credit unions are member focused. A phrase you will find on some credit unions web site is people before profits. I have most of my savings in credit unions and Vanguard not banks. 

One thought on the debt consolidation loan is you would be paying lets say 10% interest on the debt not the  20 to 30 percent interest rate. This would give you some breathing room. My understanding is on this type of loan and I could be wrong is the proceeds of the loan goes to pay the credit cards off. The lender may want those accounts closed. That aspect of the loan is something to ask NFCU what they say goes not what I think. If you calculate the difference the two rates it will give you an idea. Again research it so when your ready to make the decision you have all the information and there are no surprises.

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Thank you all for your advice! My husband and I have some homework to do 😊

[FicoMike0]

85-90% utilization has got to be killing his scores. Id consider putting extra money on the high utilization cards, rather than pay off the car loan.

First, there's a score boost for having an open installment loan with balance under 9%. If that's the only installment loan, with five or fewer remaining payments out of 60, you're under 9%. You'll hear complaints from folks who lose 20 points when they pay off a car loan. It seems crazy, but they lost that boost. It's a real thing 

Second, revolving utilization is scored on both total and individual utilization. An account over 89% is considered maxed. Scoring thresholds are at 9%, 29%, 49%, 69% and 89%.  There's a score penalty for the highest single account. If he can get all accounts under 69%, he should see a score improvement. Each threshold crossed should help.

By jockeying accounts some, he should be able to raise scores a little, making a reasonable rate loan more likely.

[Twotimesacharm]

This is great information! The payment on the revolving loan is a little over $500/mo so I was hoping to pay that off to have that money freed up and maybe get him a pledge loan with NFCU to replace it and pay it down right away to under the 10% mark. Would that work? 

I was unaware of the utilization thresholds, that's very helpful to know. I was reading more on the boards about consolidation loans and it seems pretty difficult to get approved for since it's unsecured, is that true? The only blemish he has is one late payment from about 6 years ago. Although he is basically maxed out, he has never missed a payment on anything. I'm assuming that's why he still has scores in the low 700's even with the high utilization. Decent mix of credit (cards, one revolving loan, and some small student loans). AAoA is about 12 years or so. 

If we got the balances to 69% minimum on the highest card and reduced the rest, what are the chances he has at obtaining a consolidation loan? 

[AndySoCal]

@Twotimesacharm  Any loan that does not have an asset like a car or real estate extra.  Debt consolidation loan the lender knows there is going to be a considerable amount of debt. NFCU   debt range to 50000 for debt consolidation loan.  Think what the average interest rate is they is currently being paid on those credit cards then look the potential loan rate on the debt consolidation loan. One thing is the debt consolidation loans for three years or less  the starting base rate is lower and over three years. With the debt consolidation loan your payments could be based on 3 year schedule or longer whatever works for you

I would suggest calling Navy Federal and go to a local branch make an appointment as needed.

Let them look at the debt picture and other factors and see what they would suggest for a path forward. Discuss idea of waiting for car loan to be paid off first or start the loan process now. Someone who has helped others with debt consolidation loans might have some good advice. Debt Consolidation Loan is for ultimately reducing debt. Other loans you are adding to your existing debt.