Question: I have about $4,500 on one of my credit cards, the other is paid off. I keep struggling to pay this off because of other unexpected expenses keep getting in the way. I save 3 percent of my salary in a 403(b) plan for retirement and put $70 a month aside in a regular savings account. All of my bills get paid on time. I have a good credit score of 759. Lately, I have been getting offers for a loan up to $40K to pay off expenses. At one time I used Prosper and I did pay them off, and I’m in good standing with them. Should I take them up on their offer again to pay off everything that I have and just keep the one company to focus on? Some of the interest rates on what I have are at 4 percent, 7 percent, 11 percent, and 16 percent. Maybe I can get another loan at 12 percent if I borrow 40K. I’m just so confused. I want a zero balance with everything, and it’s just taking so long to get there.
– Angie O. in Connecticut
Steve Rhode, the Get Out of Debt Guy, responds…
There are a few different approaches to tackling this. All have valid pros and cons. So, let’s take a look and some different things you can do to jumpstart your debt payoff strategy.
Using a debt consolidation loan to pay off your credit cards
Consolidating debt into a loan simplifies things because it gives you one payment to make. That way, you can stop juggling bills. Your excellent credit score will determine what the interest rate on your consolidation loan will be. Then you’ll need to do some math to see if the interest on the loan and the benefit of the one payment are a better value than what you are currently dealing with.
When evaluating the benefit of taking out a new loan, you want to look at two costs:
- Monthly cost
- Total cost
You’re currently making all of your monthly payments, so a lower monthly payment may not be needed – as long as you’re paying something comparable to what you pay on all your individual bills now, the loan will work for your budget. The main thing you want to assess is the total cost of the loan. Will the total interest charges over the life of the loan be higher or lower than the total interest charges on all your debts paid off individually?
Find the right loan to consolidate your debt.
Focusing on motivating payments first
I find that most people enjoy paying off debt fast and the math is secondary. In other words, you’re finding it hard to stay motivated to pay off your debt because you’re focused on that biggest balance. This can make it hard to stay the course because you don’t feel like you’re getting anywhere while you chip away at that large balance.
If this is the case, focus on paying off your lowest balance debt first. Then roll those now extra funds you would have paid on that debt into the next lowest balance. This approach will knock off creditors and let you focus on fewer and fewer individual accounts.
Exploring other options for debt relief
I recently wrote a big post on debt consolidation. The post goes into greater detail on more issues to consider.
Overall, I’m very impressed with your approach and progress. You are taking smart steps to save and invest in your retirement while you’re reducing your debt. You are ahead of 90 percent of people with this approach. Reading your current strategy put a smile on my face.
One word of warning, not all loan offers you receive in the mail are created equal. If the “lender” is not a mainstream name you recognize, examine the offer deeply. You can see other similar mailers people have received, here.