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One of my favorite personal finance blogs is Free Money Finance.
This week FMF shared one reader's money question and I thought it would be interesting to share with you guys.
You've had some great thoughts and solutions in the past, so I'd love to get your take with this.
Is Consolidating Debts a Smart Option?
Here's the situation:
I am looking to consolidate my credit card debt into one personal loan. Unfortunately my credit is not perfect.
Right now my credit score is 630 and I have loads of credit card dept. I've estimate I would need a personal loan of at least $15,000. Since I don't own a home this loan would have to be unsecured.
I currently have a car loan which I pay monthly and student loans that I have been paying on for 4 years and I have never missed a payment. I rent and pay utilities on time.
I have a full time job where I bring in about $50,000 a year. So would joining a credit union boost my chances for getting a sizable personal loan as opposed to going through my current bank (PNC)?
I'm curious to see what their current rates are for their debts. I didn't see it in the comments either, so I'll estimate 18.9% based on Bankrate's report.
My Two Cents on Consolidating and Paying Off Debt
Getting an unsecured loan for $15,000 seems a bit of a stretch to ask from a financial institution, whether it's a bank or credit union.
My personal experience has been that credit unions have better loan rates, but they still have to run the numbers before giving out a loan.
I would suggest being aggressive and paying off one of the credit card debts on her own with her current income.
She can then decide if she wants to keep her debt reduction plan or she can shop around for a loan. An added bonus with paying down the debt is that she can may get a better loan rate if her credit score improves.
Here's my suggestion for handling it all:
- Run the numbers. Grab or create a debt reduction spreadsheet and list all your creditors, the interest rates, and the total amount you owe.
- Keep cards away. If she hasn't already, she should not dig any further into debt. some people prefer shredding their cards, others freeze them, but I just took my cards out of my wallet.
- Find money for your debt reduction plan. Eliminating and cutting back on unnecessary expenses that don’t really matter to you can be be redirected instead reducing debt. Use either a debt snowflake, snowball, or even an avalanche to work your way to being debt free.
- Automate payments. You can bypass a lot of mistakes and relapses if you automate your credit card payments with online bill pay. Most banks and credit unions offer this feature for free.
Don't get too hung up on the method. Highest interest rate method is the financially sound decision, but paying off the lowest debt amount first is the psychologically empowering decision. Do what works for you.
I would suggest Prosper or Lending Club as options if she gets denied by the credit union. However these sites are businesses and don't just give out loans – she'd still have to fill out an application and share her finances.
Thoughts on Consolidating Loans
I know many of you have some wonderful thoughts on reducing debt so I’d like to hear your explanations.
Should she consolidate her debts or just go ahead and tackle them? Do you think she'll get a $15,000 unsecured loan easily from a credit union?