Ask Happy: Should I Take Out a Loan to Pay off a Credit Card

Dear Happy:

I am cutting out as much as I can and paying off as much as I can. I will say we are down to one credit card with a high balance. We have an offer to take a personal loan from a bank for 4 to 5 years with less interest and about the same amount I am paying on the cc. To me it seems smarted to take the loan have a fixed amount and know it will get paid in a certain time.

My husband just says keep paying what you are paying and send more when you can.

What is your opinion? I am working really hard at this with out a lot of help from my DH……


Hmm…. that’s a tough one!

Financially it makes sense to take the loan with the lower interest rate and pay off the credit card completely. You would save money and have your debt paid off in a set amount of time.

The problem with this approach is that you now have a credit card with a zero balance and if you haven’t learned any self-discipline with your spending over the years you (or your husband) will probably rack up significant debt on the card while you are paying on the bank loan. At the end of the five years you might have the same amount of debt on your credit card because you didn’t change your habits.

The other problem I see is that when you are currently paying off your credit card there is an incentive not to use it. Seeing your balance decrease every month is a motivating! It is harder to add to the balance by charging your purchases when you are working so hard to decrease your balance.

The second problem I see is that your husband wants to keep paying on the credit card. Since he hasn’t been much help in getting out of debt, squashing his idea of paying off the credit card as you go might be enough to keep him out of the debt free picture all together. If he feels alienated from the process what incentive does he have to participate in reducing your debt?

Also it is never a good idea to make a large financial decision (especially when you are signing loan paperwork) when you and your spouse do not agree on the solution. It’s bad… very bad.

You can actually use a handy credit card pay off calculator on the BankRate website to help you create a plan for getting out of debt in a certain time frame. You enter the balance, interest rate and desired months until you are debt free and it will tell you how much you need to pay each month. If you are committed to paying this amount every month then you will be debt free in a certain number of years (or months).

So while financially it might make more sense to take the loan, I think continuing to pay off the credit card might be a better idea in your situation. Let us know what you decide!

Readers, what do you think. Would you take the loan or keep paying on the card?


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Comments

  1. Tamara says:

    I do believe that yes, husband and wife should be in agreement as to how and when to pay off debt. It doesn’t sound like her husband wants to change anything. While financially (just looking at the loan) it does make sense to take the lower fixed interest rate, like you said if habits aren’t changed there could be two debts instead of one.

    Personally, I would pray about it and talk to husband about it. If he seems hesitant at all, then we would stick with the plan we have going. If he thinks it’s wise to do that, then we would probably cut up the credit card and simply not use it. Some people can do it, some can’t. We do have one card that we keep a small (less than $100) balance on and pay it monthly so that our credit rating doesn’t get crazy, but after years of paying off debt, we are very motivated. I think you just have to reach THAT point first–and by “you” I mean husband and wife together.

  2. Anna says:

    I am going to expose myself and my husband in order to answer this one, but I feel it can offer this person some very good insight. We just did this same thing she is saying last fall. We had a KILLER loan offered to us with very low interest rate, and this would pay off our debt at a much lower rate….. but we thought we had gotten smarter… I wanted to cut up the credit cards or close the accounts altogether, husband wanted to lock them up in our safe….. we did neither. So, we caved at the temptations and “needs” we thought our family had and racked up the same amount of debt in less then one year…. Yes, you heard me right, less then one year…. why? Because first of all, we had gotten used to a certain lifestyle, second of all, “needs” arose that were probably wants. I think we haven’t truly admitted to ourselves what situation we are in…. and so we haven’t made the changes necessary to get out of debt completely. I am the one who pays the bills, so I see it a lot more clearly, and Dh is too busy with work and career to really see it head on like I do. I have tried to explain it to him, but he forgets… don’t ask! (This is not meant to be an insult to my husband, I love him and we are very happy, I am just truly stating the facts as they are at the moment for informational purposes)

    So, I think the loan is a GOOD idea, but you have to close that credit card down completely to prevent another rack up! It’s just smart!

  3. I think before I made a decision, I would ask my husband if we could sit down and talk about his reasoning. Regardless of the final decision, communication is important. Even if your reader chooses to follow her husband’s lead, it’s still important for her to know that a. she is being heard, b. she is listening to her husband’s thoughts, and c. that she and her husband are on the same page.
    Financial conversations can be touchy, especially if there are other problems in a marriage. But even solid marriages can be difficult. In my personal situation, we work with a financial coach who follows the Dave Ramsey Financial Peace University model. She helps act as a mediator, keeping our conversations healthy and honest.

    I would add that my only complaint with your response was that you didn’t encourage her and her husband to get into a financial management course, something along the lines with Financial Peace University. They need to be speaking the same financial language, going after similar goals, in order to have success in their finances.

    Just my .02 cents,
    Rosalyn

  4. If the personal loan from the bank is a secured loan, I would say no, it’s not a good idea. Exchanging an unsecured debt like a credit card for a secured bank loan to me seems like a bad idea, even if it offers a lower interest rate.

    If you’re interested in getting a lower interest rate, I would suggest contacting your credit card company to see if you can negotiate a lower interest rate. We did that with one of our Chase accounts. All that was required was that the account was closed and we set up a regular payment schedule.

  5. TheHappyHousewife says:

    You’re right Rosalyn financial counseling is a great idea. I should have added that to my answer! :)

  6. Karen T says:

    My husband and I are in the process of doing FPU (Financial Peace University). Until we started this we had no idea of what we were spending and just “put it on the card” when we felt we “needed” it. It took a number of conversations to get my husband to do this with me, but if both partners are not on the same page, you are right – the cards will probably just rack back up! Getting financial counceling really opens your eyes, it did ours. So I would say yes, in her position you advised her correctly.

  7. Nikki says:

    I’m trying to get out of debt from when I was single, and my husband is very encouraging of this, as he it’s not in debt. I did pay off a cc with a low interest unsecured loan, and my husband agreed, and it’s working! I will be out of cc debt next spring! And knowing that is enough for me to not use my cc.

  8. Dianne Russell says:

    We had 2 credit cards that were killing us. After struggling for a few years trying to pay them, we finally talked to both credit card companies. They both agreed to cut way down on the interest rates if we could guarantee monthly payment. So we set up automatic payment from our credit union account that gets my husband’s navy pension check. We cancelled both credit accounts and cut up the cards. We didn’t take vacations or spend much money during that time. After 6 years we finally paid off the first credit card in May and will pay off the second card in November 2011. Finally this year we will have a decent Christmas but it will all be paid with cash.

  9. Mary Colburn says:

    It is never a good idea to try to get out of debt by going into debt. We have been there and done that. It makes things worse. Many of the responders have hit on that, already.

    My husband and I read the Dave Ramsey book. “My Total Money Makeover,”and we decided to offer a small group to people who would like to get out of debt, just like us. It was amazing! We had accountability because we were leaders of the group, support from all the group members and the Dave Ramsey people. We had $30,000 worth of debt, and it took us about 3 years to get totally out of debt.

    To this date we have hosted 6 Financial Peace University small groups. We will keep doing it, because it has helped us and other people get financially free and it is STILL helping us to stay accountable to not going back into debt.

    Many libraries carry Dave Ramsey’s books, so you can read them for FREE!!! Also, check out daveramsey.com. You will be glad you did.

    Thank you, Mary Colburn

  10. Anna says:

    Many years ago we were in the same situation. We used a low-interest loan to do the same thing–we saved A LOT of money. Perhaps if they sat down with a bank officer or a financial planner and they showed husband and wife the savings, they can come to a mutual agreement. I have a friend who had an improvement done to her home that cost $3000, they financed it several years ago and because of interest, have paid back over $12,000 on $3000 worth of work. Youch!

  11. Lela says:

    Say the worse will happen and someone dies or you have a situation where you lose one or both jobs. A credit card is unsecured debt and is very easy to go Bankrupt on, most bank loans are SECURED debt meaning you have to list collateral such as a house, car etc.

  12. sylvia says:

    I think the credit card payoff calculator is the key here. Being able to see what you are capable of paying and where it will get you, would make the decision clear. I think they will find that an aggressive payment plan on that card will do the job. A loan to pay it off does come with the significant risk of ending up with a loan to pay AND a new credit card balance.

  13. Tonya says:

    Good advice. Definitely pay off the credit card. To take a loan to pay it off and KEEP the credit card could be a disaster. Watching the balance go down on the CC balance is encouraging; but having the statement come each month and making SURE it doesn’t go up gives you accountability. Check out Crown Ministries for the “pay one off, then add that amount to the next debt” method. It’s the best way.

  14. Robyn says:

    I totally agree with another post I read, never exchange unsecured debt for secured debt! Also, due to the recent recession, credit card companies are very willing to work with you in settling your debt. They will setup a reduced interest payment plan for you; however, during this time you will not have charging privileges. That is only a positive because it will force you to learn new behaviors regarding the use of credit cards.

    Financial counseling is also very advisable so that you learn how to work together for a positive financial future!

  15. Jen says:

    @Anna- I commend you for sharing your story. It will really benefit anyone who wants to be real and admit that we are all human and this is the real danger of rolling cc balances into a loan.

  16. paula says:

    great advise…….lots of things to consider.

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