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Staying on track after getting a debt consolidation loan

By  |  Published: January 28, 2017

Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

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Question

Dear Credit Smart,
I am getting a loan from my bank to pay off my balances on my department store credit cards I have eight credit cards in total. Two I haven’t used in a long time. They have $0 balances. The rest, I have almost maxed out. I have always made my minimum payment or maybe $5 more, on time, and have had several credit increases.

I had a rough year last year and had to run them up to get by but I didn’t let get behind. Now that everything is back on track, I want to eliminate the number of bills I have. The percentage rates on my credit cards are really high, ranging from 23 to 29 percent. The consolidation loan I’m getting is 10 percent and in all I will be saving $150 a month having the one loan payment verses six minimum credit card interest payments.

I really want to close the accounts but I don’t want to have a large impact on my credit score I have had about 30 accounts on my credit which I have less than half with any balances or are open still, including my student loans car payment and mortgage so I have a lot of good credit history. I really want to close all or some of these credit card accounts to reduce temptation and reduce the number of bills I have to pay every month.

I have a three-year plan to either buy or build a new home. I just really am unsure what to do to keep my credit on a steady track to meet my three-year plan. I need professional advice. – Tiffany

Answer

Dear Tiffany,
You seem to have a good idea of what you want to accomplish and have done a lot of work to make it happen. Your plan not only reduces your interest rates, it saves you money every month. I would say that’s a good plan for anyone and you deserve a pat on the back for taking the steps to reduce your debt and improve your overall financial situation.

One thing I would suggest is that you think about what you will do with the money you are saving. While $150 a month is not all the money in the world, it is not insubstantial and could certainly help you in your desire to move to a new home. While it may not be practical for you to save every cent, you should certainly earmark a substantial amount for savings. I would suggest you open a separate savings account for these funds. Choose a different bank or credit union that is not affiliated with your current bank and don’t link them in any way. This is a great strategy for preserving savings because it makes it just a little bit harder to get to your money.

As for your credit cards, I have to tell you that closing a bunch of accounts at one time will affect your credit score negatively, at least in the short term. Part of your credit score depends on available credit; if you close an account that credit goes away. You can – and you should – go ahead and pay off those cards with your loan, but consider leaving most of them open. If you have cards that charge a high annual fee, you might go ahead and close those accounts.

The ones you leave open you will need to use on a fairly regular basis to get the most benefit for leaving them open. The way to do that is to only charge amounts that you can pay off quickly and only charge items that you will have to buy anyway. For instance, you can use a card for gas and another card for groceries. Those expenses should already be built into your monthly spending plan; you will simply use another method for payment. This may not be practical for some store cards, but you did mention that you ran them up recently to get by implying you were able to use them for some of your regular expenses. Those cards could be used in this manner.

I know you are concerned about having many bills to pay, so I would suggest you look into auto pay for your accounts. This will simplify your bill paying each month and insure that your bills are always paid on time. Paying your creditors on time is the No. 1 thing you can do for your credit score. This means you must pay all your bills on time, every time. Any bill you have that you can pay using auto pay – including utilities, your mortgage and student loans – would benefit from this service and you won’t have to worry about missing a payment.

As for the temptation of extra available credit, keeping your eyes on the prize of a new home may help to curb those impulses. You can also simply put the cards away. This is similar to the trick of having a separate savings account. If the cards are not readily accessible, it is easier to really think about a purchase that you may not really need.

Remember to always use your credit smarts!

See related: 6 debt consolidation traps (and how to avoid them)

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Updated: 08-20-2017

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