Consolidate debt into high-rate personal loan? Don't

A 29 percent loan may be convenient, but the terms are terrible

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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Dear Credit Smart,
Hi there. I was just wondering if we have six credit cards at 25 percent each would it be wise to consolidate all those into one personal loan at 29 percent for 36 months? Just wondering if we would save on interest even though our payment may be a little higher on the personal loan. – Shaun


Dear Shaun,
The appeal of having one payment – as opposed to six – is really the only reason to consider this option. Trading six cards at 25 percent interest for one consolidated loan at 29 percent would likely not save you any money in interest, unless you take longer than 36 months to pay off those cards.

Since it appears that having a higher payment would not be all that difficult for you, I would suggest you try another route to becoming debt-free in those 36 months. This is something that you can do on your own that will almost certainly save you on the amount of interest you will ultimately end up paying.

The first step in this process is to quit using your credit cards unless you can pay your new charges in full every month. You don’t have to close your accounts. In fact, I would suggest that you not to do that in order to protect your credit score. I have pointed out in this column several times that closing accounts will cause a slight decrease in your score. But it is very important that you not add to the debt you already have incurred.

Next you need to figure out how much you owe to each credit card company and what the minimum required payment is for each. Once you have that, you will need to decide how much above the minimum you can afford to pay. This amount will not change, just like a loan payment.  If 36 months is your goal, you can use a credit card debt payoff calculator to help you figure out what that amount should be.

Assuming that all of all of your cards are at 25 percent interest, you have two choices for which one to pay off first. You can either target the lowest balance card or the highest balance card. You will see quicker small victories results by going with the lowest balance, but this is really just a personal preference.

Your strategy will be to pay the minimums on the other five cards and then send the minimum plus the extra to the sixth card. When that card is paid off, you will take the amount you have been sending to that sixth card and apply it to the next card. Remember, the amount you will pay out every month will not change until the very final payment.

If handling six payments is hard for you, take advantage of online services and set your payments to autopay.  This will help you stay current on your cards with little effort on your part once the initial work is done. While this process does take discipline, it can be very rewarding to see those cards paid off one by one. At the end, you will be debt-free instead of simply trading one debt for another.

Remember to always use your credit smarts!

See related: Don’t close accounts after paying card debt

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Updated: 11-22-2017