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Consolidating Credit Cards
By Meg | June 10, 2008
Lots of folks out there are or are soon to be overwhelmed by credit card and other debt payments. They’re struggling to make the minimum payments, their rates are high or are on the brink of rising if they miss even one payment, they have little to no liquidity or reserves in case of emergency…
I got a surprising phone call from a fellow employee in such a situation today. He told me someone had given him my name and had recommended he call me to see if I could help him get a consolidation loan for some credit cards. He just bought a home last year, and his main goal is not to lose it. He has four cards which total $30K in debt (rates 10% - 28%). His home has equity, but not much (not enough for a home equity loan). He has a car lease of $500 a month. His only asset besides the home is $15K in a retirement account. Oh, and he filed bankruptcy 6 years ago.
Unfortunately I can’t really help him (we’ll call him L) from a banker’s standpoint. I had him fill out a balance sheet, pulled his credit, and analyzed his debt-to-income ratio and interest rates on all his cards. The problem is that he - and probably many others - didn’t realize that you can’t just go get a consolidation loan from a bank unless you have some sort of collateral to pledge. Banks don’t give unsecured loans (except in very rare cases to very rich people who basically don’t need them)!
Here is the email I sent L, along with the only advice I knew to give:
Dear L,
I checked your credit and the good news is that you have a pretty decent score - 667.
1) The most important thing you can do right now is to maintain that score (and/or increase it) by not making ANY late payments. If you make a late payment on any of your loans, all your credit cards can and will increase to 20%+ interest rates. And of course you should stop using the cards.
2) Because of your good score, I the first thing I would do (asap) is try calling your credit card companies and asking for an interest rate reduction. They might not agree at first, perhaps because of your bankruptcy filing, but I want you to push and ask to speak to a manager. Generally they will lower your rate, sometimes dramatically (if nothing else works you might even hint that if you can’t get some relief you might have to file bankruptcy again; that might get their attention since if you did file they would not get anything back).
3) The second thing I would do is take advantage of any low or 0% interest financing options that you can find. For instance you might get offers in the mail for such credit cards which offer 0% for six months on balance transfers. Don’t apply for too many at once (it will lower your score), but see if you can’t take advantage of one or two. If you can roll over some of that high interest rate debt to low / 0% rate cards, you can lower your payments dramatically for the short term and start making extra payments to principal.
4) Your bankruptcy should fall off your credit report next year. At that time your credit score should go up dramatically as long as you have no late payments. At that time I would look into refinancing your house. Your payment seems high for your mortgage size, so I’m assuming you have a high interest rate because of your credit history. Lowering that payment by a few hundred bucks should be more than feasible in a year or two. And if you still have credit card debt at that time, rolling it over to low/no rate cards should be easier then as well.
But to your request: You want a $30,000 loan in order to consolidate your credit card debt. The problem is that no bank is going to give anybody an unsecured loan; you have to have collateral such as a CD or car or home. You don’t have enough equity (yet) in your home for a home equity loan, and you don’t own a car. Your only viable asset would be the 401k, but after penalties and taxes for early withdrawal you would not have much left, and I would never recommend liquidating retirement assets to pay debt anyway (though if you did get really desperate you could always take a loan from the 401k to pay off the highest rated debt - you’d have to pay the money back though, plus interest).
5) Check out Prosper . It’s a social lending forum where individuals can lend or borrow from each other without using banks or credit card companies; instead you borrow from Prosper as in intermediary, but really you’re borrowing from many separate individuals who bid on your loan. I’ve been a member for over a year, and it’s really great. A lot of people go there to get consolidation loans just like you are looking for. The highest loan amount you can get is $25,000 I think, and you may be better off requesting a smaller one anyway (you have a better chance of being bid on). If you go there and apply for an $10,000 loan - enough to pay off the two highest rated cards - you’d end up paying $25 less a month on those two cards combined, but the debt would amortize over three years - i.e. it would be completely paid off in 36 months rather than going towards mostly interest.
The good news is that you make enough to pay your debts each month - even though I’m sure things are tight once the bills are paid. Your debt-to-income ratio is only 36% (most banks consider 40% to be the upper limit they will allow when approving loans). I estimate you have appx $1,700 leftover each month after paying your debts and car lease payment. You are NOT going to lose your house in this situation.
All you have to do, worst case, is make it for another year until your bankruptcy falls off the record and your score goes up. Then you will be able to roll over your high rate cards and re-fi your mortgage and pay it all more comfortably. And / or you can wait until you have enough equity in your house to get a HELOC and pay off all your cards (which is only a good idea if you seriously cut up the cards and never use them again - otherwise you just end up with no home equity PLUS credit card debt). If the idea of making it one more year seems completely impossible, you may want to look into getting some part time income or taking other seemingly drastic moves such as cutting cable/cell phones, breaking your lease agreement and getting a cheaper car, selling some stuff on ebay to pay off small chunks of the debt, etc.
I wish there was an easier way, but I hope you don’t feel too frustrated. Please let me know if you have any questions at all or if I can help in any other way. Good luck!
What do the readers think? What would you have told L?
More from Meg at The World of Wealth
Topics: Banking, Credit Cards |
June 10th, 2008 at 8:14 pm
If this person applies for 0% credit cards he should also plan on closing the old card to reduce the temptation of racking up another card
June 10th, 2008 at 8:22 pm
Umm $500 for a car lease??? He must have a really posh vehicle. I’m pretty sure my roommate leases a car for $250. I’m not sure if you can end your lease early, but it might be worth looking into for an extra $250/month.
June 10th, 2008 at 8:45 pm
Actually I have to say that was a very detailed and thoughtful response. Hopefully L will take it to heart rather than blowing it off. I know the situation he’s in when you can’t get a consolidation loan and your debt is eating you alive.
Sarah, a lease is often incredibly hard to get out of especially if you’ve driven a lot or beaten the car up. He might actually be better off holding on to it for the time being even at the $500 a month.
June 10th, 2008 at 9:09 pm
I think bankruptcy stays on your credit report for 10 years, not 7. E.g.:
http://www.debtworkout.com/credfaq.html
June 10th, 2008 at 10:00 pm
Overall I think you gave L excellent advice.
June 10th, 2008 at 10:03 pm
I like your response. We both know that his credit score is pretty weak (especially in this day and age, a 670 may have been considered good a year or so ago - but these days the chances of getting anything unsecured with a bankruptcy and a FICO under 700 is pretty slim).
Also, I am pretty sure that Edward is right - the bankruptcy will stay on for 10 years.
Clearly, he didn’t learn much from his first bankruptcy (which is why there are so many repeat bankruptcy offenders).
I used to see this kind of thing all of the time when I was a personal banker - these onversations are always tricky and I think that you handled it really well.
June 10th, 2008 at 11:20 pm
Great advice here is a link that L might like to read on getting out of debt and a link to some financial calculators that may be useful.
http://www.aplusstockresearchcenter.com/7_StepstoReduceCreditDebt.htm
http://www.aplusstockresearchcenter.com/calculatorsmain.htm
I hope this helps I know it can be a long and frustrating road. The key is to learn from past mistakes and not to repeat them.
June 11th, 2008 at 3:09 am
One big and rather judgmental point: is he still using the credit cards, or is he working to pay them off? Does he have a reasonable emergency fund?
If his car lease is anywhere near getting out of, he should dump it and buy a set of cheap wheels after working to save for a few months. If he’s too precious to drive a used Civic or similar gas-miserly car, he’s a lost cause. But if he can stomach having a student ride for awhile, this move will save him tons of money.
Not only can he get out of the $500/month nut, he can probably lower gas expenses and go liability-only on his car insurance, which saves another bunch of money. The savings should go to nuking his debt.
He shouldn’t refi his CCs - he should do the zero interest thing and work to pay them off. He shouldn’t treat his home equity as an ATM machine.
June 11th, 2008 at 8:30 am
I would have told him to sell the car, Surely he can get a good used one. Also, he has $1,700 left over each month after paying debts? Was the mortgage in that, or will he still have to pay the mortgage?
June 11th, 2008 at 8:49 am
I’m really suprised that he has a $500 a month lease when he filed for bankruptcy 6 years ago. I agree, he should try to offload the car. Great advice though. It sounds like he wants a quick fix for his problems unfortunately, but hopefully he will listen to your advice.
June 11th, 2008 at 9:21 am
JLP do you recommend transferring unsecured debt to secured debt? Just curious - I subscribe to Suze Orman was well, and she flips out when people do that so I was interested in your reasoning behind that.
June 11th, 2008 at 11:24 am
Great advice JLP. I’d have him dump the vehicle if possible (get a less expensive one), have a huge garage sale and use the proceeds to pay on the smallest card balance and get a night/weekend job making some extra cash to get those cards paid off.
He has to look at his own financial situation as if he were a new CEO coming into a financially troubled company. Where can I cut expenses? Do I really need a Citation 5 jet? Can we sell an under producing plant or business unit? Can we license a patent or copyright to generate some cash? Can we freeze or delay our dividend? Can we renegotiate with our creditors? Does anyone OWE US money that we can collect or sell the paper?
He needs to get ruthless and make some hard choices. It isn’t easy, but he can come out on the other side and be much better off.
June 11th, 2008 at 12:10 pm
Ron,
Actually, Meg wrote this post.
June 11th, 2008 at 2:53 pm
Thanks for the great comments. L emailed me back graciously today and asked for the credit counselor’s info. I gave it to him but suggested he not pay too much for advice he could find on his own and gave him a bunch of articles on credit score/debt/etc. There are no errors on his report and he only has a couple of cards with not completely outrageous rates, so I don’t know how much a counselor could actually help.
@Preston - I don’t generally recommend paying off unsecured debt with home equity or other secured debt. Most people will keep using the cards anyway and then just end up further in the hole.
However I don’t think it’s always 100% a wrong decision. If the person is serious about cutting out credit card debt forever and he or she can barely make minimum payments because the cc debt is at 30% but can obtain a low interest rate, tax deductible HELOC - well, it’s not ideal, but it’s better then bankruptcy.
I don’t think this is one of those cases though…
June 11th, 2008 at 3:47 pm
I am shocked is credit is so high after going bankrupt and owing $30,000 in debt. I’m also surprised he is paying $500 a month for a car if he’s in that much trouble! But you gave him good advice — transferring balances to a no-frills zero or very low-interest card is the way to go.
June 11th, 2008 at 8:22 pm
Didn’t see post author - thanks for getting back Meg. I realize each situation is unique. I have the fortunate experience to be doing well at a young age so I am trying to digest as much information as possible to make sure I stay on a good path.
June 12th, 2008 at 12:13 pm
Great advice Meg! It’s sound and conservative.
The only thing I might add — as it’s been mentioned in the comments and it’s a common credit score trap that many folks seem to fall into — is to advise L to keep his credit card accounts open even when he pays them off.
About 30 percent of your credit score is “amounts owed,” which includes the proportion of how much credit you use (total of all credit balances on your credit report) compared to how much credit is available to you (total of all credit limits on your credit report). The lower this proportion, the better. By closing credit card accounts, you’re lowering the amount of credit available to you, which increases the proportion, and as a result, may take a toll on your score.
If L feels like having several credit card accounts is too much of a temptation, keep the accounts open, but cut up the cards.
For more info on how to make improvements to your credit score, Quicken Loans has a pretty handy educational guide on credit at https://www.quickenloans.com/education
June 22nd, 2008 at 2:21 am
I agree with some of the previous comments on the car lease. $500 seems a bit extravagant. I suggest he use a service such as LeaseTrader.com to get it off his hands and find much cheaper means of transportation such as an used car with great mpg, carpooling, public transportation, and biking.
July 17th, 2008 at 10:06 am
Payday Loans are a great alternative to bouncing checks and paying inflated bank fees. They are quick and easy and can help you overcome an unforeseen expense until your next payday.
July 18th, 2008 at 11:51 am
Payday Loans are good when you are in a bind and need to catch up on your bills, they are quick, easy, and confidental.
July 18th, 2008 at 1:55 pm
Payday Loans are easy to get. They require minimal paperwork and minimal time. You can repay them on your payday and stay on top of your finances.
July 19th, 2008 at 2:09 am
Payday Loans have also some advantages and disadvantages as well if your need urgent money then it is the best option for you but it takes little bit high interest rate as compare to others loans
July 19th, 2008 at 2:24 am
Same day cash loans are primarily aimed at those salaried people, who need the monetary support within hours for paying off an urgent bill or to avoid late payments. You can get your account filled with money within hours!!
July 21st, 2008 at 12:44 pm
Payday Loans can help save you from paying inflated check bouncing fees when you are short on cash. Instead of paying large fees to your bank just get a payday loan. They are quick, easy and confidential and can get you to your next payday safely.
July 23rd, 2008 at 6:44 pm
The charges on Payday loans are less expensive than bouncing a check or paying late fees. It’s also a great option for someone who doesn’t want to get caught up with credit cards debts. They can also help in a tight situation, its quick, and most places are open longer hours than banks.
July 24th, 2008 at 9:45 am
Payday Loans are great! They can be repaid quickly, require minimal paperwork and get you the cash you need.
July 25th, 2008 at 3:55 pm
I think the payday loan system is great! Theres not a single person who doesn’t have emergancy’s and payday loans really help out.
There quick and easy and really do help.
August 4th, 2008 at 9:30 pm
Payday Loans have also some advantages and disadvantages as well if your need urgent money then it is the best option for you but it takes little bit high interest rate as compare to others loans
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