Consolidating Debt with a Personal Loan
I was wondering if it's a good idea to take out a personal loan to pay off credit cards? All told I owe Mr. Plastic about $10,000. I am thinking that it would be better to get a 2 or 3 year personal loan from my credit union at 11.65% rather than the 21% and fees some of my cards charge. It looks good on paper but with this much debt I'm wondering if the banks would consider my application to start with and if there are any pitfalls I should avoid.
Before you go get a loan from the bank, you might try the following ideas. First, call the credit card companies and ask them to reduce your interest rate and waive the annual fee. Many cards will do that if you have been a good customer and make your payments on time. Second, if the interest rates are still higher consider doing some shopping for new credit cards. There are many cards out there that charge no annual fee and usually offer an introductory rate for 6 months of under 10%. Get a few of these lower rate cards, transfer your current balances, and then close out the former accounts. Continue to move your balances around to keep the lowest interest rate possible. It takes some bookkeeping to keep track of when to transfer the balances, but it keeps the interest rate low (often lower than what you could get at the bank).
I would like to point out that if the person interested in taking out a loan to pay off credit cards can get a home equity loan then all interest paid on the loan is tax deductible. But taking out a loan to pay off old debt is never the answer. What is the answer is to scale down one's lifestyle dramatically.
First off, this person needs to cut up the credit cards, and quit spending any money except that which is required to live each month. No shopping for clothes, etc. If he cannot make the minimum payment each month, then send a little each week. Don't eat out. Cook in bulk and freeze. Hang laundry out to dry. Turn off lights in rooms. Bake bread.