Mailbag Monday: Using a Personal Loan to Pay off Credit Card Debt
I was able to get a personal loan from my bank (with a low interest rate) to pay off $40,000 worth of credit card debt. I have a total of nine cards. Is it advisable to cancel the cards that I have paid off? Should I cancel the ones with a higher or lower credit limit? I don’t see myself using these cards in the future so is it wise to even keep them?
— Kris
Hi Kris. I’m going to give you the answer you asked for – and some advice you didn’t. And then I want you to print this out and tape it to your fridge so you look at it every day. Although I’m sure you’ve read that cancelling credit cards hurts your credit score because it’s a knock on your credit utilization (the percentage of credit you have available to you, compared to the amount that you’re actually using), in your case closing some is the right thing to do for two reasons. First, you simply have too many. And second, it seems as if they’ve been too tempting for you in the past. Start by closing the ones with the lowest limits, the highest annual fees and the highest interest rates. In other words, hang on to the ones that – once you get your act together – you might want to use as a tool to make purchases you pay off every single month.
Getting your act together is the thing that you didn’t ask about – but that I’m going to address anyway.
Research on people who used home equity lines of credit to pay off credit card debt (which is very similar to what you did) shows that about one-third of those people are back in credit card debt a few years later and they still have the home equity line to pay off. In other words, they’re in double trouble. I don’t want this to happen to you. So, I want you to figure out how you racked up all this credit card debt (was it one or two big emergencies vs. living above your means on a monthly basis) and work on that problem. If you need help, go see a not-for-profit credit counselor affiliated with the National Foundation for Credit Counseling. It doesn’t sound to me like you need a debt management plan, but they can help you get your budget in line.
