We get a lot of emails from people who are really up to their eyes in arrears. One question buy vcc online we get asked repeatedly is, “Should we get a unsecured loan to pay off our credit cards? inches Each situation takes a different approach.
The reason why people ask us this question is simple. On a credit card you are paying 20% plus a year on interest, where on a bank loan you are paying 10% a year interest. The difference while only 10% is huge in dollar terms over a year and it often times will be the difference in paying down an amount of debt in a more speedily time. The answer seems pretty easy right; well there are many shades of greyish in the answer.
However there is a couple of questions you should ask yourself. Only when you can answer YES to each question should you see getting a unsecured loan to pay off your credit card.
- Once the credit cards are reaped rewards will i cancel them?
There is no used eliminating your credit cards in full in order to start at a zero dollar balance and start racking up debt fitted again. Because you pay down your credit card to zero, the bank doesn’t cancel them. You need to request this. We have known people in the past who have done this and continued to use the card like it was a person’s money. Fast forward a year. They will have a percentage of the original debt on a unsecured loan, plus their credit cards are in same debt position we were holding when they took the loan out. You need to be able to cancel the credit card 100% when the balance has been paid down.
- Are you comfortable with your home budget?
Are you just scraping by monthly? Or do you need to resort to credit cards to make the difference. Many people believe if they take out a personal loan to pay off their credit card this will be the answer to their budgeting problems. They take out a personal loan, pay off their credit card, they take our advice and close their credit card. However then traumatic events strikes, their icebox breaks down. Due to the fact they are living pay cheque to pay cheque they have no money saved. As quickly as you can say, “I’m doing something that is not very smart” they are back onto any credit card company for a quick approval to get a new plastic card to cover the icebox. Or they are down at the shops taking up a pastime free offer on a icebox. Before you take out a personal loan, test yourself. Explain to you a few scenarios mentally. What would happen if you needed $1000, $2000 or $3000 quickly? Could you cover it without relying on back to opening a new credit card?
- Are you experiencing a debit card?
There are some payments these days where you might need a credit card number. Let’s face it, over the phone and internet shops, sometimes credit cards are the only way to pay. A debit card allows you to have all the advantages of a credit card but you use your own money. So there is no chance of being charged interest. When closing down your credit card, make sure you have previously set up a debit card. Make a list of all the monthly automatic direct debits. You can easily call these companies and get them to change your monthly automatic direct debits to your debit card. You don’t want to start getting late fees due to your credit card being closed when companies try to make withdrawals.
- Can you make additional payments on your unsecured loan without being penalised?
While credit cards are a financial life-sucking product, they have one good advantage. You can pay more than the minimum payment without getting penalised financially. For example, if you had $20, 000 in arrears and reaped rewards $18, 000, there is no punishment for this. Personal loan are not always this cut and dry. There are two different types of personal loan to consider; fixed interest and variable interest.
The big difference has been variable interest you can make additional payments without being penalised (or just a minor fee is charged on the transaction depending on the bank). However with fixed interest, you are tallying to a set amount of interest over the course of the loan. In fact you could pay out a 5 year fixed interest loan in few months and you will nevertheless be charged the full five years of interest.
We strongly suggest you take out a variable interest loan. You would have the major benefit for paying additional money to cut the time of the loan, and the total interest you must pay. If you are looking over this you want to reflect you are extremely keen to get out of debt. And you would be looking to put any additional money to this cause. As your allowance becomes healthier over time you need to have more and more money to pay off the non-public loan. You don’t want to be in a situation where you can afford to pay out the loan in full (or a considerable amount; however there is absolutely no financial benefit by doing it.
- Is the credit card balance beyond their budget to pay out next six months?
If you owe $20, 000 on your credit card, have $500 in the bank and you are living pay cheque to pay cheque, then obviously you will need more than six months to pay back your total debt. However if you only owe an amount, which when carefully looking at your allowance you truly believe you could pay out in few months, our advice is to forget about the unsecured loan and concentrate on crushing, killing and destroying your card. With most personal loan you will need to pay an straight up cost, a monthly cost and in some cases, make several trips or phone calls to the bank. All these costs can far outweigh any benefit for getting interest off an amount you are so close to paying back. In this case, just buckle down and eliminating the card.