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I will start off by saying that I suck with credit cards. I just can't manage them, and if I have access to them, I end up impulse spending money. I should not need to; I earn great money, but I seem to be really good at compartmentalizing things and creating this false economy with cards where I think I am doing okay, but really just getting worse.

I have about $22,000 in credit card debt with rates from 12%-19%. I have an $18,000 personal loan at a rate of 12.99% with 2.5 years left on it. Thanks to some recent events, I pretty much have no savings now.

I want get rid of my cards. I want that debt to be "non-reusable" debt. I am confident that with no debt, I would never need cards again. I have had debt as long as I have been working; I am 31 now, and I want it gone.

I am looking at getting a personal loan for total debt + $3,000 at %13.89 over 4 years, with the target to end in 3 years.

The extra $3k is to put into savings so I can start my new budget with a cash buffer.

Questions:

  1. Is the cash buffer from the loan a bad idea?
  2. Should I consolidate just the cards, and have two loans to pay off?

If it makes any difference, I estimate I can pay between $1,200 and $2,000 a month of this debt while still saving $500 a month and living comfortably. Any holidays would have to come out of that $500 a month.

  • 1
    +1 for self-reflection. Knowing where the problem lies is the first step to successfully implementing the answers below. – Matthew Bradshaw Jul 13 '17 at 5:05
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My answer is similar to Ben Miller's, but let me make some slightly different points:

There is one excellent reason to get a consolidation loan: You can often get a lower interest rate. If you are presently paying 19% on a credit card and you can roll that into a personal loan at 13.89%, you'll be saving over 5%, which can add up.

I would definitely not consolidate a loan at 12.99% into a loan at 13.89%. Then you're just adding 1% to your interest rate. What's the benefit in this?

Another good reasons for a consolidation loan is psychological. A consolidation loan with fixed payments forces you to pay that amount every month. You say you have trouble with credit cards. It's very easy to say to yourself, "Oh, just this month I'm going to pay just the minimum so I can use my cash for this other Very Important Thing that I need to buy." And then next month you find something else that you just absolutely have to buy. And again the next month, and the next, and your determination to seriously pay down your debt keeps getting pushed off. If you have a fixed monthly payment, you can't. You're committed.

Also, if you have many credit cards, juggling payments on all of them can get complex and confusing. It's easy to lose track of how much you owe and to budget for payments. At worst, when there are many bills to pay you may forget one. (Personally I now have 3 bank cards, an airline card, and 2 store cards, and managing them is getting out of hand. I have good reasons for having so many cards: the airline card and the store cards give me special discounts. But it's confusing to keep track of.)

As to adding $3,000 to the consolidation loan: Very, very bad idea. You are basically saying, "I have to start seriously paying down my debt ... tomorrow. Today I need a some extra cash so I'm going to borrow just a little bit more, but I'm going to get started paying it off next month." This is a trap, and the sort of trap that leads people into spiraling debt. Start paying off debt NOW, not at some vague time in the future that never seems to come.

  • Add a few more "very"s to that "bad idea". Big step in the wrong direction. – keshlam Dec 17 '15 at 13:17
  • Thanks I will consolidate just the cards and have 2 loans to pay off. i will take a short term and both loans should complete at the same time. and I will not get the cash buffer, i will pay minimum on the loans until i have saved my cash buffer (1-2 months). Appreciate the good advice. – TheRealTy Dec 17 '15 at 21:21
  • Agree about two loans. Focus on paying off the one with the higher interest rate first. I.e. pay normal payments on the one with the lower rate. Pay normal + extra on the loan with the higher rate. With any luck, you'll pay off the consolidation loan by the time the 2.5 years is over on the existing loan. Be sure that the extra is applied against principal. This used to be default (maybe even by law). Sometimes lenders apply against the next payment these days. – Xalorous Aug 18 '16 at 13:31
  • @Xalorous Years ago I had a loan where I made an extra payment, and the bank applied it against future payments instead of principal. After I wrote some letters that go no response, I finally called them and they told me that that was the terms of the loan. I read to them from the loan contract where it said that I could "pre-pay the loan in whole or in part at any time". The person on the phone said, "Well, to do that we'd have to re-issue the note". I said, "I'm sorry if it's a lot of paperwork, but that's what the contract says." They refused to accept the prepayment. The amount of the ... – Jay Aug 18 '16 at 18:36
  • ... loan was small so I finally just gave up. I surely could have sued them for breach of contract. The idea that someone would blatantly tell me, "yes that's what the contract says but living up to it is too much trouble so we won't" just amazes me. – Jay Aug 18 '16 at 18:37
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First of all, congratulations on admitting your problem and on your determination to be debt-free. Recognizing your mistakes is a huge first step, and getting rid of your debt is a very worthwhile goal.

When considering debt consolidation, there are really only two reasons to do so:

Reason #1: To lower your monthly payment. If you are having trouble coming up with enough money to meet your monthly obligations, debt consolidation can lower your monthly payment by extending the time frame of the debt. The problem with this one is that it doesn't help you get out of debt faster. It actually makes it longer before you are out of debt and will increase the total amount of interest that you will pay to the banks before you are done. So I would not recommend debt consolidation for this reason unless you are truly struggling with your cashflow because your minimum monthly payments are too high. In your situation, it does not sound like you need to consolidate for this reason.

Reason #2: To lower your interest rate. If your debt is at a very high rate, debt consolidation can lower your interest rate, which can reduce the time it will take to eliminate your debt.

The consolidation loan you are considering is at a high interest rate on its own: 13.89%. Now, it is true that some of your debt is higher than that, but it looks like the majority of your debt is less than that rate. It doesn't sound to me that you will save a significant amount of money by consolidating in this loan. If you can obtain a better consolidation loan in the future, it might be worth considering.

From your question, it looks like your reasoning for the consolidation loan is to close the credit card accounts as quickly as possible. I agree that you need to quit using the cards, but this can also be accomplished by destroying the cards. The consolidation loan is not needed for this.

You also mentioned that you are considering adding $3,000 to your debt. I have to say that it doesn't make sense at all to me to add to your debt (especially at 13.89%) when your goal is to eliminate your debt. To answer your question explicitly, yes, the "cash buffer" from the loan is a very bad idea.

Here is what I recommend: (This is based on this answer, but customized for you.)

  1. Cut up/destroy your credit cards. Today. You've already recognized that they are a problem for you. Cash, checks, and debit cards are what you need to use from now on.

  2. Start working from a monthly budget, assigning a job for every dollar that you have. This will allow you to decide what to spend your money on, rather than arriving at the end of the month with no idea where your money was lost. Budgeting software can make this task easier. (See this question for more information.

  3. Your first goal should be to put a small amount of money in a savings account, perhaps $1000 - $1500 total. This is the start of your emergency fund. This money will ensure that if something unexpected and urgent comes up, you won't be so cash poor that you need to borrow money again. Note: this money should only be touched in an actual emergency, and if spent, should be replenished as soon as possible. At the rate you are talking about, it should take you less than a month to do this.

  4. After you've got your small emergency fund in place, attack the debt as quickly and aggressively as possible. The order that you pay off your debts is not significant. (The optimal method is up for debate.) At the rate you suggested ($2,000 - 2,500 per month), you can be completely debt free in maybe 18 months.

  5. As you pay off those credit cards, completely close the accounts. Ignore the conventional wisdom that tells you to leave the unused credit card accounts open to try to preserve a few points on your credit score. Just close them.

  6. After you are completely debt free, take the money that you were throwing at your debt, and use it to build up your emergency fund until it is 3-6 months' worth of your expenses. That way, you'll be able to handle a small crisis without borrowing anything.

If you need more help/motivation on becoming debt free and budgeting, I recommend the book The Total Money Makeover by Dave Ramsey.

  • Reason 2-plus-epsilon: if the sheer number of loans is making you forget to make some payments, or is making the problem seem insurmountable, or is hiding just how much trouble you're in, consolidation may be worth considering just to simplify the paperwork and as a tool for setting the right attitude. But for other folks that might scare them into paralysis, and it removed the "yes!" moment as each smaller loan is closed out, so this one's a matter of knowing your own reactions. – keshlam Dec 17 '15 at 13:15
  • Thanks for such detailed advice. In my mind, i just want the cards gone. Even if it costs me a little more. My average interest rate on cards would be about 16% across all card debt so I think i will consolidate just the cards and have 2 loans to pay off. i will take a short term and both loans should complete at the same time. – TheRealTy Dec 17 '15 at 21:19
  • Also bought the book :-) – TheRealTy Dec 17 '15 at 23:22
  • Sounds like a good plan to me, @TheRealTy. If you sacrifice a little now, you will soon be debt free. Good luck to you. – Ben Miller Dec 18 '15 at 0:28
  • "Give every dollar a job." This is the mantra of "You Need a Budget". (budgeting software). This can be a useful tool. YNAB for budgeting + Dave Ramsey for planning and you can set up a livable plan for becoming debt free. – Xalorous Aug 18 '16 at 13:35

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