I am fixing to get married and my SO is coming in with a decent amount of debt. The total amount is approx 10-15K. She has these debts spread out to two cards. The Utli on those are approx 80-90% on each. Her total Utli on all her cards is approx 35-40%. Her scores are in the upper 600's to lower 700's. I was thinking about getting her to get a personal loan and paying off the CC debt with that so that her total ulti on all cards and individ cards both is between 8-9%. Do you think this would increase her scores?? Would the installment debt of the personal loan have less of an impact on her score then the current utli is having now??
Very difficult to get a personal loan. Banks don't like to give unsecured loans to pay off credit card debt. And it doesn't make sense for her to get a personal loan (if she could even get one) unless the interest rate on the loan is lower than the CC with the lowest interest rate.
How about a low-interest BT instead?
----------------- Bartender, bring another round of FICOtinis please!
She has the debt on two cards with fairly good interest right now, but my main thing was trying to get this debt in to an installment loan versus the revolving debt that has her utli high. I thought that would drastically improve her score. Of course we would only do it if we could get some sort of loan at a comparable interest rate.
I will offer my opinion, and reasons, for I have done this very thing, and received a substantial FICO boost along with lower overall interst payments in the process. But it requiries the analysis of her personal situation, for no action is best for all. The answer is not as simple as a yes or no. It depends on many factors.
First, aside from the %util factors, does she have any other installment loans? If not, she is probably currently taking a hit in the FICO %credit mix category, and getting an installment loan will improve in that category. Remember, actions taken affect more than just one FICO category. While credit mix is admittedly only 10% of total FICO, and %util is 30% of FICO, most of the 30% is revolving,and not installmen, utilization. So shifting %util to installment rather than revolving util may in fact help. As we are all aware, the hit for higher install %util is much less than for higher % revol util, and my experience has shown it is by a factor of about three to one.
But then another factor enters in. When do you plan to apply for new credit? Getting a new installment loan, providing you are lucky enough to get in on her first applic., will cost her at least one new hard inquiry in the new credit category, and thus cost an intial hit of close to ten points, but this will go away in one year. So if new credit is not to be sought within the next year, the new inquiry is a wash.
As for a BT, while a BT may be immediately attractive, most BTs default to the normal credit card rate after a short intro period, and requrie a BT fee of 3% to 4% of the BT when initially made. And this is NOT related to annual APR, it is a straight and immediate hit to the groin. Even if you pay it off in 6 months, it is the same as paying a 6-8% interest rate over that period, even though they dont call it that. So again, when can the BT be paid off? If the new install loan is at a comparable rate, then no BT fee is involved, and no threat of defaulting to the normal credit card rate hangs over her. You get a guarantedd install %APR for the term of the loan, which will normally be at least two years.
So, look at all these factors, some affecting FICO, some affecting interest paid, and some based on when you need to apply for additional new credit, for it is only then that FICO has any meaning. I looked at them all, and benefited from the new iinstall loan option to pay of existing CC debt. But I got an install loan at a comparable rate, avoided the BT fees, and was not planning to apply for new credit within a year. FICO went down the first month, as the new inq. hit fast, and the new loan took a couple of months to post. So, again, is your immediate FICO score (within the next six months) important, or can you take the combined benefits six months from now without having to rely upon it for anything more than ego.
I will only add other comment from experience. If short term FICO gain, within the next few months, is a real consideration, then a BT can hurt big -time. I did a BT last year, and the CCC receiving the payment was MUCH slower in reporting to the CRA the reduced debt than was the CCC from which it was transferred. It thus reported as revolving debt on both cards, hitting me double for over a month. It all smoothed out in a couple of months, so again, one must look at when one expects to actually need your FICO score in applying for new credit. Dont expect them all to instantly report a BT, and an instantaneous shift in debt on each account. It wont happen.