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Last week, I talked about the importance of credit utilization, but what about getting a consumer loan to paying off credit cards? Does this make sense? There are definitely some positive attributes to many people who may struggle with paying off credit cards.
If you are one who may or have misused credit cards, then you likely know the impacts of high-interest rates plaguing your monthly statements.
It also makes you feel like you receive a never-ending bill or expense. Below, I am providing several reasons why consumer loans can assist you and why you should consider this approach.
You should not be paying credit cards with credit cards. This is highly discouraged. Rather, another approach is one similar to a method that businesses use all the time. When debt becomes overly burdensome because of the high monthly expense making it difficult to stay afloat or because your income isn't sufficient enough to keep up with monthly payments, companies will obtain debt to pay off the old debt. This could amortize the debt amount for a longer period of time causing monthly payments to be lower.
A major downside to this is that you pay on the debt longer because you have taken that original amount you owed and stretched it out for a longer period than the original time horizon. For example, a debt that was originally scheduled to be paid of in 18 months has changed with the new loan for 26 months.
However, in some situations, this may be necessary as to not feel overwhelmed or in the worst case situation, to avoid bankruptcy.
There is nothing that I dislike more than poor customer service. A financial institution, whom I shall not name, would call monthly offering me other products they provide. After many attempts asking them to stop, I would be plagued with email sponsors from this firm trying to get me to refinance my auto, my home, obtain credit cards through them etc. And when I call this company, I felt like I was just a number. I would be put on hold, felt like I was wasting the rep's time because of the negative attitude that was being portrayed, etc. This poor taste in customer service showed me that I didn't matter to them. Not that I expect to be prioritized but I do want to feel like the company values my business.
This is the most important reason and why I left it for the last and final reason. Credit cards are widely known to carry high interest rates. According to CreditCards.com, the average credit card carried a 15.07% annual percentage rate (APR).
When I started my DEBT FREEDOM JOURNEY (Click link for this free debt plan), I took something from my educational tool chest and applied it to an approach that financial institutions use--a proven debt payment strategy. I had over $25K in credit card debt and the average APR was approximately 14%.
The issue with having a high APR is the interest accumulates much faster than a lower interest rate. So the approach was to find a consumer loan offering a much lower rate and use those proceeds to payoff the credit card.
This had three positive impacts on my life. The first good impact was the proof it worked. The following month, I saw a huge increase jump in my credit score. This is how I started learning about credit utilization.
The second impact was seeing my debt shrink faster in principal and interest when compared to my credit card statement.
And finally, the last impact was the amount of time it took to payoff the debt. When the credit card would have taken me 18 months to payoff and the new consumer loan would have taken 24 months, I saw a sharp decline in how long it was going to take to payoff. My time horizon had shrunk. Because I had been used to the regular high credit payments each month, I had freed up cash allowing me to quickly payoff the consumer loan. The loan time horizon went from 24 months to 16 months--a SIGNIFICANT REDUCTION!
Below are two firms that I highly recommend and have used if you are in a similar situation.
Prosper has loaned over $9 billion while delivering competitive rates. The steps and process are easy because you answer a few key questions to determine your rate, then choose the type of loan you are applying with the firm. Finally, once approved, your receive funds very quickly--typically within a few business days.
SoFi is a private financial services firm that offers a variety of products from student loan refinancing to personal loans from investors versus corporations. Another great benefit this firm offers is they will cut your interest by an additional 0.25% if you set up your account for auto-draft.
Here is another option that I have heard great praises about, but I have not used this company personally. It is Madison Financial. They offer short-term loans from $100-$1000 which is perfect for numerous emergency situations or needs.
Another firm that provides traditional loans and prides itself on "no hidden fees or lengthy paperwork is Lendr. Typically, you receive funds in as little as two business days.
It is highly important to note that this strategy should only be applied in the event to save money by paying a lower interest rate. Because of this strategy's importance, you must NOT use your credit card during this payment solution because it will add more debt to the current debt you are attempting to pay off. If you are committed and motivated enough, then this technique is highly effective but only useful for those determined. Makes sense right? Because why would you want to add more debt to credit cards when you got a loan to pay if off. Get a consumer loan, then put your credit card in the freezer so you won't use it.