Should I take out an Installment Loan?

[Anonymous]

Hey Guys should I take out an installment loan to pay off my cc debt? I’m paying the same on my credit card as I would pay monthly to this installment loan. I’ve read things in this community about it, but I’m not sure if the Hard Pull credit decrease is worth it.

[rbentley]

Do you already have an installment loan on your reports?  If so, there would be no scoring benifit to transfering the balance to a loan at the same interest rate.  You would likely see a temporary score decrease due to the additional inquiry and new account.  If you don't have an installment loan you may see an increase score after its blance is paid down before 8.9%.  

Of course there is a beneifit to freeing up your available credit and especially so, if you have high ultilization on it.

[Anonymous]

I have a high utilization ratio (3 credit cards and one of them is almost maxed but it has the highest balance).  I have student loans, I don't have any other installment loans.  Does that change the situation?

[Anonymous]

Here are some reasons to consider not taking out the loan:

There is no financial incentive.  The financial incentive in these cases is that the loan is for 12% (say) with the CC rate being 19%.  But in your case you say that the loan is also at a very high rate.

There is a financial risk.  That is that, when you pay off your cards with the loan, you will then have room to run your cards back up to their maximum.  Then you will end up with double the debt.  Your cards are maxxed out for a reason.  Faced with the choice between painful saving and spending you chose to spend.  An important part of this debt elimination process is what in AA is called "making a searching and fearless written moral inventory of yourself."  Socrates called it simply "know thyself."  Part of that for you may be knowing the risk of having a bunch of free credit.

For these reasons I would suggest just creating a very tough budget for yourself and then paying down your cards:

      * Always make at least $2 more than the minimum payment on every card.

      * First pay them all to under 87%

      * Then pay them all to under 67%

      * Then pay them off in whatever way most encourages you to pay off all the debt.

You may find that when you get them to all under 67% you can get a far better deal on a loan.  If you do, have a friend hide the cards where you cannot see them.

[Anonymous]

CGID is absolutely correct, this is a budgeting problem, without fixing that first, the loan can often be a vehicle to an even larger problem.

[rbentley]

CGID is a Community Leader and Super Contributor for a very good reason.  His points are spot on.  Your student loans are already filling the "installment loan" category in your credit mix.  If there is no interest reduction then there is absolutely no reason to shift the balances.  Your balance shift would only be freeing up space for more debt.  I would be concerned that even a new CC with a 0% blance transfer might result in you finding yourself in 2x the trouble, if you ran up your newly available credit.  I recognize that you have high balances now, but as CGID pointed out, they got there due to your spending habits.  Not to be judgmental, but overwhelming experience shows that those with high CC UTL quickly return to that after their cards are paid off but still active, if they merely transferred them to a new source.  If you could reduce your interest or have some outside restraint imposed on your spending patterns it might make sense.

The best thing you can do is impose some discipline on yourself and pay these accounts down as quickly as possible.  This is easy to resolve to do, but far more difficult to do in practice.  There are so many new, shiny things out there.  I am speaking from personal experience and not trying to be condescending.  Many have thought they could resist "my precious," but like Gollum in LOTR eventually succumb to the dark side of credit.  Be a Frodo.  The Far Shore awaits.

[Anonymous]

Thanks guys!