Real Life Debt Consolidation Loan Example
You have a gas card with a balance of $400 at 18%, a Master Card with $6000 at 14%, a VISA with $8000 at 15.9%, and a department store card with $6500 at 22%. You owe a total of $20,900. Your local bank charges 12% interest for equity loans and has an $800 loan origination fee. Your strategy might be to borrow $20,900 with an equity loan from the bank to payoff all your balances, and close out the accounts. Now you’ll still owe $20,900 but at a lower APR of 12%. Also, at the end of the year, you are usually allowed to write-off the interest you paid, effectively making your APR even lower. Most equity loans are 15 year notes, so try to send in extra principal every month to accelerate that payoff time. Make sure your bank allows pre payment and extra principal payments. Online sites usually have lower rates than banks. Now you are paying one check every month to pay off your credit card debt.
But supposing you only have $7500 equity in your house. How can you consolidate all your debt with $7500? You can’t, you’ll have to choose which accounts to payoff. The department store and gas card have the highest APR, so shoot for those. You’ll need to borrow $6900 with your equity loan. There is no reason to borrow more, and you should not either. Sure you would like to buy down some of the interest with your equity, but if you don’t have enough to pay it off and close the account, then there is a very high risk that you’ll just run the balance back up again. Some accounts you can close, then just continue to pay them off, then you’re OK using the remainder of your equity balance to buy down whatever you can on the balance. But we cannot stress the importance enough that you must not let your balances go back up. Consolidation loans and equity loans are potentially dangerous in the wrong hands because you are adding another channel of credit, so use it wisely, and always be fully aware of what you are doing.How to Manage You Credit Wisely
It is difficult to imagine life without having credit. You need a solid credit history to buy a house or a car. Some employers even check out your credit record before giving you a job.
The ability to buy something now and pay for it later creates an obligation to repay the debt. The longer you take to pay off the balance, the more it will cost you in interest. So, managing your credit wisely requires self-discipline so you are able to score well with credit grantors.
Credit grantors, such as banks and retail stores, track all your financial habits. These creditors report their experiences to the credit bureaus, such as Trans Union, Experian (formerly known as TRW) and Equifax.
Creditors use a scoring system to judge whether you meet its criteria. For example, you receive more points if you own your own home and have lived there several years, held a job for a long time, have large balances in your bank accounts and have handled credit responsibly with previous creditors. If you job hop or move frequently, and pay off your debts late, you receive far fewer points. Unfortunately, you don’t see your credit score, which is compiled each time you apply for credit.
Interestingly, most creditors will lower your score if you have too much credit available from other sources. Even if you have a spotless payment history, the opportunity for you to go on a spending binge exists in the eyes of the credit-granting agency.
If you think you have a low score, there are steps to take to manage your credit wisely to boost your credit score. You can apply for a secured card, deposit money, make a few purchases and make your payments on time. Consider applying for a department store or gasoline credit card and build small balances, but pay them off in full each month. Over time, your credit score will rise, and you will qualify for unsecured credit cards on your own.
Some additional helpful tips:
- Don’t apply for more than one or two credit cards at a time. Each inquiry about your credit is included in your credit report. If too many credit grantors inquire at once, they’ll all be suspicious of your intentions.
- Make it a personal rule not to charge disposable items on your credit cards. Purchases such as food, gasoline and even other debts should be paid for with cash as the purchase is long gone by the time you receive your bill. Who wants to finance a gallon of milk for seven months?
- Consider transferring your balance to a lower rate card. If you apply for and accept a lower-rate card, immediately transfer the outstanding balance from your old, higher-rate card. Ask the issuer of the new card if they have actual payment checks that can be sent directly to the old card issuer to pay off your balance. This method can avoid costly cash advance fees.
- Make sure the low rate applies to balance transfers.
- Avoid cards that charge interest from the date of purchase with no grace period as well as cards that charge interest immediately on a cash advance, plus charge a fee for each cash advance.