Paying Off Debt: When CC Companies Won't Reduce APR
For the past two years I've been living, for the first time, under the weighty, grey cloud of credit card debt. Foolish use of personal credit cards to fund asset purchases for an LLC have resulted in an uncomfortable amount of recurring, high-interest debt. Recently, upon realizing that I have become comfortable with paying more than 0/month in minimum CC payments, I set out to reduce that number and speed along my debt reduction.
Currently, my plan is to pay above the minimum on all cards except that one which has the highest balance/APR ratio; that card gets any extra income I'm able to throw at it. Once a card is paid off, the amount of its monthly payments gets redirected to the card with the highest balance/APR, thus speeding up the payoff. This will continue until all are paid off.
However, in the interim, I'd like to reduce those APR's. Currently, they stand at 22.99%, 19.99%, 18.99%, and 13.24%. I've contacted all of my CC companies numerous times requesting a rate reduction. Some were kind and offered me temporary, reduced rates. The highest of the bunch however, refuse time and time again.
My question then, is thus: What are the downsides to taking out a no-fee, credit union offered, lower-interest loan to pay off the most damning of my CC's?
Many advance thanks.
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Your companies are declining to lower your rates because you are describing it as being kind. When I was in a similar situation, I called each one, starting with the highest rate, and said this:
For the last little while things have been tight and my balances have crept up on all my cards. Now I'm about to start a fairly dramatic paydown. I'm going to be doing highest-rate fastest, which is you. Are you able to lower my rate so that you can continue to collect it?
Some said no. Some said "ask again when you've paid more than the minimum three months in a row." Most said yes, and sometimes by a dramatic amount. It made a real difference to getting things under control.
I agree with the other answers that extra on each card is just not as fulfilling as putting all the extra to a single card. If you must still use a card (to put gas in your car, buy groceries etc) getting one card to zero will return you to not paying interest even when you use it, so you might want to start with your lowest balance and then go to highest-rate once you have one clear one you can use. (If your balances are all so high that it will take a year or more to get one to zero, then maybe not. But if one is low drive it down first.)
As for the consolidation loan, for some people it's the key to saving interest and getting the debt behind them. For others it's a chance to catch their breath and run up even more debt. Most people cannot predict in advance which they will be or which others will be. Be aware that it is a risk. You can vow that you will never again cover payroll with a cash advance from the company credit card (or your personal one) but when push comes to shove, you just might anyway.
Normally, I'd say that because of the "magic of compound interest", balances of high rate cards shoot up rapidly, so pay off the high rate cards one by one until they're all zero.
In this case, though, 23%, 20% & 19% are close enough that I'd pay off the card with the highest balance, then 2nd highest, then 3rd and leave the 13.24% card for last.
Note that -- sooner than you think -- other card companies will send you low-rate balance transfer. Take one ASAP and pay it down as much as possible so that when the low introductory rate is over, the balance on your now-high-rate card is low.
Bottom line: balances on high interest rate card accumulate incredibly quickly, so kill them first one at a time.
Without knowing what the balances are, I associate "uncomfortable" with high, as in tens of thousands.
What I would do: is 1) cut up the cards and stop using them, and 2) have some balance transfer offers in hand the next time you call to negotiate with the companies. Essentially, you will have to convince them that they will have to explain one of two things to their boss: why they lowered your rate or why you left.
They can collect less interest from you or no interest from you. It's up to them. If they don't offer you something that's in the ballpark of your balance transfer offer, then bid them goodbye and complete the balance transfer.
As far as paying them off, the top two modes of repayment are lowest balance first (aka snowball) or high interest rate first. Both methods are similar in that you pay minimums on all but the method's focus point. Whether it is lowest balance or highest interest rate, you pay ALL of your extra money on the lowest balance or the highest interest debt until it is gone and then you move onto the next one in the list.
For what it's worth, I prefer the lowest balance method, you see progress faster.
If you hadn't done it already cut up the cards. Don't close the accounts because it could hurt your credit score even more.
Switching some or all of the CC debt onto low rate cards, or a debt consolidation loan is a way that some people use to reduce their credit card payments.
The biggest risk is that you become less aggressive with the loan payback. If you were planning on paying 0 in minimum payments,plus 0 extra each month; then still pay 00 with the new loan and remaining credit cards.
Another risk is that you start overusing the credit card again, because you have available credit on the card that was paid off with the loan.
The third risk, which you haven't proposed, occurs when people switch unsecured credit card dept, to a secured 2nd mortgage debt. This then puts the family home at risk.
Sometimes you need to do more than ask to have your rating reduced.
You need to make it in their best interest (no pun intended) to do it. Find the lowest rate card and then tell the others you want to transfer your balance to that card and close the account (don't do it, it is an empty threat). I guarantee they will transfer you to a retention agent who will give you a better deal.
From their perspective your current offer is getting 19% interest instead of 22%, why would they do that without some motivation? With the approach described above their options are get 19% interest instead of 0% interest. It is all about negotiation and the "Retention agents" have the most leverage to do so.
Sometimes there are credit cards that offer a (promotional) 0% APR on transfers with no transfer fees. It can be a good option to move the money to one of these if you're disciplined enough to keep hacking away at the debt before the APR jumps.
You are on the right path. Especially for the fact that you are paying the highest rate card with highest priority.
As long as your credit score will not stop you from getting the credit union loan, this is a great idea. It will turn the highest rate card(s) into something more reasonable and let you continue to attack principal instead of mostly paying interest.
The question asked in your last paragraph (what's the downside) is answered simply; if you take out a loan and close the cards, that's a ding on your score because your leverage ratio on this portion of your credit jumps to 100% or more, and because you'll be reducing the average age of your lines of credit (one line of credit a few days old versus five lines of credit several years old each). If you take out the loan and don't close the accounts, it's one more line of credit, increasing your total credit, lowering your leverage, but making institutions more reluctant to give you any more credit until they see what you'll do with what you have.
In either case, assuming you can get the loan at less than the average rate of the cards (that's actually not a guarantee; a lot of lenders will want APRs in the 20s or 30s even for a title loan or other collateralized loan), then your cost of capital will also go down. That gives you more of a gap of discretionary income that you can better use to "snowball" all this debt as you are planning.
Another thing to keep in mind is that the minimum payment changes as the balance does. The minimum payment covers monthly interest at least, and therefore varies based on your interest rate (usually variable) and your balance (which will hopefully be decreasing). A constant payment over the current minimum, much like a more traditional amortization, would be preferable.
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