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Dear Debt Adviser,

Is it smart to get a personal loan of $17,000 to pay off credit card debt? The cards have a maximum interest rate of 11.2% and my income is about $100,000 annually before taxes. I don’t have a mortgage.

— Ira

Dear Ira,

Your credit card debt would not be paid off with a personal loan; it would simply be shifted to another type of debt using a different credit instrument. Sort of like rearranging the deck chairs on the Titanic, your actions wouldn’t materially change what’s going to happen, although in your case it might make it worse.

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Here’s why: Many personal loans have a payback period of no longer than 60 months, or 5 years. Credit cards tend to amortize your payment over 8 to 10 years, resulting in a lower payment over a longer time. While many personal loans use a fixed rate, you can expect a rate of at least as much as you are paying, perhaps mid-single digits to 25% or more. Again, it could be a higher payment. Rather than move the debt around, I’d advise you to do 2 things.

RATE SEARCH: Research personal loan rates today to find the best one to consolidate your credit card debt.

First, stop charging and determine why you have $17,000 in credit card debt with take-home pay of approximately $75,000 per year. If you want to use credit for convenience, get a new card and don’t carry a balance. That way you won’t pay any interest on new purchases like you do now and you can concentrate on whittling down your $17,000 debt without new charges obscuring your progress. Based on your healthy income, unless you have enormously overspent in nonhousing areas, you should have plenty of discretionary income to buy what you want or need without having to add to your card balance. So, let’s begin there.

If you don’t already have one, create a spending plan. Track all of your expenses including daily and out-of-pocket purchases, such as lattes or cigarettes. Here are some national budget percentages of net income to help you determine where you may be going over the top.

National budget averages

Average percent of income spent in each category:
Housing (mortgage or rent, real estate taxes) 24%
Utilities (water, power, garbage collection) 8%
Food 14%
Clothing 4%
Medical and health care 6%
Donations and gifts to charity 4%
Savings and insurance 9%
Entertainment-recreation 5%
Transportation (car payments, gas, service) 14%
Personal, debt payments, misc. 12%

Consider these as guidelines and expect your own personal budget will vary, but if the difference is huge, ask yourself why and if you might be better off cutting back in some areas. For example, you may live in an area where rent is very expensive, so that category may be more like 35% of your net income. But if your housing costs are more than 50% of your net income, you may need to look into making some living changes, such as getting a roommate or moving to a less-expensive place — likewise, if your transportation costs are 30% of your net income. Understand that if you don’t do something to change things, you may have to cut back elsewhere.

The goal of a spending plan is to enable you to make conscious decisions about where your money is spent and in the process help you reach your financial and personal goals. Once you have a workable spending plan in place, the 2nd thing I want you to do is include paying off your credit card debt over the next 2 years (approximately $790 per month) in the plan. Do this while also setting aside some money in an emergency savings account. You will likely need to make adjustments to 1 or more other categories in order to accomplish this, but a short-term sacrifice will be worth it in the end.

Good luck!

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