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Credit Cards: Should I get a loan to pay them off?
1ddqd
Registered User regular
Registered User regular
I have 2 credit cards with BofA that were emergency use, and (surprise!) we had an emergency last year. I've been paying what we can afford, but it's barely made a dent, and the interest eats up a lot of the progress. Here are the details:
I have a couple of store credit lines (0% interest deals for furniture, tires) that I'm paying off without issue, but could be considered for the loan, I suppose.
Here's the goal: I want to buy a house in the next year, and right now CreditKarma estimates my score at ~635. That's enough to qualify but I'm going to get an above average interest rate with a crap APR. Should I get a loan to consolidate this and ratchet down the interest rate on Card 1?
I was thinking that if I lower my credit card utilization by rolling the debt into a loan, then my score will tick up a bit. Obviously, I'll leave the cards open, and barring any emergencies, should be able to pay down the loan at a more reasonable rate.
The thing is, now it would show as a larger portion of debt (and at 100% utilization, no less). Here's the visual:
Card 1: 92.2% utilization
Card 2: 87.5% utilization
Furniture Card: 61% utilization
Tires Card: 25% utilization
Loan: 100% utilization
I have a couple of store credit lines (0% interest deals for furniture, tires) that I'm paying off without issue, but could be considered for the loan, I suppose.
Here's the goal: I want to buy a house in the next year, and right now CreditKarma estimates my score at ~635. That's enough to qualify but I'm going to get an above average interest rate with a crap APR. Should I get a loan to consolidate this and ratchet down the interest rate on Card 1?
I was thinking that if I lower my credit card utilization by rolling the debt into a loan, then my score will tick up a bit. Obviously, I'll leave the cards open, and barring any emergencies, should be able to pay down the loan at a more reasonable rate.
The thing is, now it would show as a larger portion of debt (and at 100% utilization, no less). Here's the visual:
Card 1: 92.2% utilization
Card 2: 87.5% utilization
Furniture Card: 61% utilization
Tires Card: 25% utilization
Loan: 100% utilization
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Because those balances are so low I'd say it's pretty extreme to get a debt consolidation loan at this point.
The better move would be to just pay them directly. If you can't at least make a dent in 5k worth of credit card, then you don't have any business owning a house to start with.
The ideal utilization is between 10 and 33%... but if you could even get into the 50's that would look fine to an underwriter
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What about trying to transfer the balance to another card? I know I get the 0% interest for x amount of months offers with new cards in the mail every so often.
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The downside is that it's a hard credit hit, and a new balance means shorter history. FICO prefers long credit histories with few credit hits.
I have about $3,500 in savings now, on track to have $15k by next year (purchase time). I have no trouble making rent, but I realize that my budget means I'm looking at a FHA loan (3.5% down is all that's required). It means paying mortgage insurance until I break 80% equity, too.
I don't want to use savings to pay off these cards (or even a portion) because of the emergency we encountered last year, and whether or not something else happens. My savings budget cannot be compromised in the interim.
I could probably shift my budget around and pay more on the cards each month. Right now, I pay $175 on card 1 and $75 on card 2. I think I can bump card 1 to ~$250 if I'm careful, and card 2 to $125. That means my monthly credit card payment goes from $250 to $375, but it also means paying them off in around 15 months as opposed to 24.
I'm just sick of paying these off so slowly. I know it's not a lot in the grand scheme of things, but it's really frustrating.
if you can actually save 15 grand, then just pay the off and wait another few months or another year to buy a house
the doomsday scenario where rates were going to spike when the fed started ending quantitative easing has, for the moment, proven to be false, primarily because the housing market is still so depressed
you still have time to get your rate
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Honestly, with the interest rate on that first card, I'd use at least some of savings to just pay it off. And even if all you do is increase the payments, you should be putting all the extra on the first card until it's paid off, then put that total towards the new card (i.e. if you can afford 375/month, pay the minimum on card 2 and pay everything else on card 1, that will minimize the interest you have to pay).
Thanks for all of the advice guys
You definitely need to focus on Card 1 first, as noted. That interest rate is 'standard', but it's the major hurdle for you right now.
Regarding your child, you can take this advice or leave it, but he's not going to remember that you moved into a house right now or in the next few months. He likely won't remember later in life even if you do it a year from now, unless you constantly reinforce this with HEY remember when we moved wasn't that awesome?!. He just won't.
I understand that you want these environmental benefits for him for enrichment purposes or mental stimulation, but if your current living situation is stable, you can replicate this with daily trips to the local park or playground, playtime outside, or just taking walks together. He will enjoy it now, and he won't remember anything about it in a year or two. I promise. ;_; Getting a house is for you, not him. Save your money and find the right place at the right time for you.
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Great point, thanks for that.
I agree with this advice and endorse it quite a bit, by paying the cards off (even just the higher interest rate first card) with savings, and then continuing to save, you can be in a great position for when your son starts school. I think that is a crucial time to have stability and all the creature comforts that owning and living in a house can provide for everyone in your family. so clear the credit cards, save now, make the sacrifice if your current situation won't destroy your sanity, so that you can get a house that will be exactly what you need for the long term during some of the best formative years for your son and family.
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If you can manage to stay in your current place without going crazy stay as long as you can to save up before getting a house! Especially if you're feeling rushed and pressured to get a house by some certain developmental milestone you may end up making a purchase that ends up not being as good long-term as you may have hoped, vs waiting a few years and being able to take your time and get The One. You may even end up with some cute apartment-y memories! The only memory I have before I was 4 or 5 - I was probably 3? - is wandering around our downtown cruddy neighborhood with my dad at 1am to go to the dunkin donuts and sit outside watching traffic and talking to old dudes with insomnia and homeless guys. Um, that might not be the kind of memory you're really jazzed about creating but it's so different tonally from the rest of my really little kid memories that it's something really special to me.
Look at it this way- if the worst should happen, and you end up having to default on the cards, they can get a judgement against you to make you pay the balance. If you default on a loan, you lose whatever you put up as collateral- like cars, property, etc.
Take what you save and throw chunks at the first card until the balance is zeroed out, then work on the second card. Don't close either of them, that'll hurt your credit. Then, when they're both clear, just keep taking everything you were paying and put that into savings, and build up your down-payment fund. You'll have more money you can throw to your savings and sparkling credit for a better rate.
Will it take longer? Sure, but at least then one emergency won't put you into the position of possibly losing your newly-bought home because you can't pay the mortgage.
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Can you open up a line of credit with a lower rate? That's what I did. I still use my credit card but pay it off every month via my LoC that has a significantly lower rate. Of course, I pay the LoC off also, just slower.
Are you sure about that? I haven't paid attention to new credit card offers in a while, but that seems unusual.
Your store credit cards have a high utilization. I'm not sure your credit score will improve significantly in just a year just by shifting some credit card balance to a loan. However, it could help you save money. If you do go that route, try to get a loan from a credit union, but be wary of the false psychological freedom it gives you to incur new balances on your credit cards.
I'm making assumptions based on the little information that's here, but you don't sound like you're ready to buy a house next year. The reason you provided is not really a good reason to own a house if you're not financially ready. Assuming you can at least live in an apartment where you don't have to worry about excessive crime or something like that, your child will have a great experience if you love him and spend time with him. My parents didn't buy their first house until I was about 7. I have many fond memories of playing with the kids in neighboring apartments and exploring the apartment complex together (though admittedly, it has now become a scary thought to let your kids go anywhere out of eyesight).
I do not think it is at all a bad idea to buy a home with an FHA loan and the minimum 3.5% down payment if you can afford it. However, if you are buying things like furniture and other relatively low priced items with credit cards without being able to pay them off immediately, that makes me think that buying a house isn't that wise. Living in an apartment is not at all terrible for a family, but if you buy a house and then for financial reasons, you later need to "downgrade" to an apartment, that will seem devastating.