Are Loans a Good Idea to Pay Off Credit Card Debt?

Credit CardsThe following article is brought to you by Travis Holmes.

Credit cards are open lines of revolving credit, often charging high interest rates and tempting the consumer to run up a high amount of debt without really thinking about it. By the credit card companies own admission, this form of credit is not meant to be used often or extensively, and no one should carry a debt.

When facing a situation where you are carrying credit card debt, it is vital to find ways to pay as little interest as possible, without doing anything to damage your credit score. One of the better ways of handling this is to transition the debt to a personal loan, and close all but the oldest credit card account you have. Here are a few reasons why you should do this.

Lower Interest Rate
Credit card companies can often charge over twenty percent in interest. This can result in the average consumer spending a great deal of money in maintaining a debt, rather than paying it off. Over the long haul, having to spend money on interest decreases the fiscal strength of the borrower and actually increase the amount of debt carried.

A personal loan has a fixed interest rate, and since it is not a revolving line of credit it is impossible to add new principal to it. In short, it is a one-shot deal, with limited interest and a payment plan that is predictable.

Take note not all loans will have a lower interest rate. Some quick loans might be good for your situation but may carry a higher rate. It’s best to verify the rate and do the math yourself.

One Line of Revolving Credit
By closing out all but the oldest credit card account, the consumer is doing two things. The first is limiting the potential for future debt, by decreasing the amount of available credit at any given time. Since you will have less free credit to utilize, it would be harder to make impulse purchases that land people in debt to begin with. This article helps you weigh the pros and cons of both.

The second reason for keeping the oldest account open is to take advantage of long term credit on the consumer’s credit report. A credit report is only as strong as the oldest item on it, so it makes more sense to keep a credit card in play if the consumer has had that account for several years. Doing so can reduce the amount of interest paid on other forms of credit, including the personal loan.

Additionally, having an open line of credit is a good thing in an emergency. It can provide an emergency cushion if you encounter an expense that you cannot fit in your monthly budget, but can pay over the course of two or three months. This becomes less needed as the consumer starts saving money, but starting out this flexibility is crucial.

Transitioning debt from a higher interest rate, revolving account to a lower interest rate, closed account, can serve as a way of lowering the amount of hard earned money wasted on interest.

Doing so can set the stage for a better, more stable financial future as long as certain steps are taken at the same time. Eliminate most of your open credit, in order to limit potential exposure to negative forms of debt. Start putting back the extra cash each month, to provide a means of paying for emergency expenses without having to turn to credit.

A personal loan can be invaluable when trying to improve one’s fiscal health. By taking the time to formulate a plan, it is possible to create a system that will lead the consumer to a better and more stable financial future. All it takes is the ability to take advantage of the lower interest rates.

Why You Need To Get Out Of Debt

We tend to focus on saving money around here, but today we’re going to talk a bit about debt, why you need to get out of debt, and how you can start.

Statistics vary, but in the U.S., the average person has a credit card balance of between $8,000 and $15,000. In Canada, a recent survey found that while 75% of Canadians believe debt has a “positive impact” on their lives, 58% feel uncomfortable with their debt and a third say they lose sleep over it.

What does this mean that people tell themselves that something they lose sleep over and that they’re uncomfortable with is still somehow a positive force in their lives?

Believing The Myth

People didn’t always have credit cards. Once companies realized just how much money they could make with them, marketing went into overdrive convincing you that not being able to pay for something was just a technicality. In a few years, we became so accustomed to buying whatever we wanted, that the notion of not being able to afford something rarely even registered.

When I resisted incurring debt to afford the latest things, some of my friends thought I was actually crazy. The idea that I wasn’t buying things because I had other priorities for my money was literally incomprehensible to them. After all, if you just put it on your credit card, you can do whatever you want!

The Cost Of Debt

One way to look at your debt is to calculate how much you’re actually paying for all this stuff you buy. A $500 purchase in cash will cost you just that, $500. Putting it on a credit card with a 20% interest rate and not paying it off for a year means the same thing will cost $600. If that balance is a part of a larger revolving debt on your card, and it takes you, say, 3 years to pay off the whole thing, that purchase will end up costing over $850.  Wouldn’t it be awful to still be paying for things long after you were finished using them?

On a larger scale debt is slavery because a large portion of your money will go towards your debt and interest payments.  How will  you afford a comfortable retirement when you can’t save anything for it.  You will work longer than you planned to and then you’ll live in poverty during your “golden” years.

Take Control

Think long and hard about the choices you’ve made and ask yourself if you’re really happy with them.  If you decide you want to be in control and not in debt to anyone, there are plenty of options. Make a list of all your debts, including minimum payments for each.   Cut expenses, sell stuff you don’t need, and negotiate more favorable payback terms where possible.  Make debt repayment a priority and attack it with everything you can.

If you still feel it’s hopeless, learn about debt reduction program options at www.debt.ca.  Professionals will have more options and will help you find what’s best for your situation.