Credit card payoff loan may be a bad move

Steve BucciQuestionDear Debt Adviser,
Is it possible to convert my credit card debt to a personal loan? If yes, will it affect my credit score?
-- Pondering P.

AnswerDear Pondering,
Yes and yes!

It is definitely possible to convert your credit card debt to a personal loan. That is, as long as your credit is good enough to qualify for a personal loan. Many reasons come to mind for why you may be thinking about consolidating your debt into one loan. One, you may be looking for a lower interest rate and payment. Two, you may need the discipline enforced by a regular monthly payment as opposed to the choice to pay only the minimum amount due. Three, you may be unable to afford the minimum payments and need a loan with a monthly payment you can afford. Four, you may have maxed out your card and want to continue to overspend. Let's look at each of these four in more detail.

Finding a lower interest rate. To get a break on interest rates with a personal loan, you will need to have good to excellent credit -- a FICO credit score range of 680 to 850. Interest rates will be higher on a personal loan than a secured loan, such as a mortgage or car loan. That's because the lender has no collateral to back the loan. So, unless you have really good credit, you may not qualify for a personal loan, or at least for an interest rate that would create a big savings for you. An alternative you might consider is transferring your credit card debt to one credit card with a low interest rate. Be sure you understand any transfer fees or one-time charges.

Locking in a payment. Should you want a more structured repayment that a personal loan provides, but you don't qualify for one, you have other choices. Under the right circumstances, you could consider a home equity loan to pay off the accounts with a regular monthly payment at a lower interest rate. Keep in mind if you choose this option that you are transferring unsecured debt to secured debt, and most likely lengthening the time it will take to pay off what you owe.

Lowering your payment. If you can no longer afford your monthly payments, you might consider contacting your creditors and asking for a hardship program. They frequently have programs that last for a set period of time to help you make more permanent arrangements to pay your regular balance due. They can't raise your rate just for asking, like they could in the pre-CARD Act days.

Increasing your spending limit. If you are maxed out, you could ask for a higher credit limit, but I don't recommend it. In this situation, I'd much prefer to see you close the account so you can't add to your balance, and pay at least the minimum while applying any windfall income like tax refunds or birthday money to the balance. It's no fun, but unless you stop charging, you'll never get out of debt.

As to your question about the effect of a personal loan on your score, yes it will lower it initially. Between the inquiry from the lender and the new credit line, you can expect it to negatively affect your score for a while. Once you show that you can manage the new credit over time, expect the negative impact to go away. The variety of accounts should then count in your favor, and you may see a score increase.

My bottom-line advice is to make the move to a personal loan or other financial solution only if you believe it will help you get out of debt and improve your overall financial situation.

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