Friday, December 21, 2012

Consolidating Debt with Personal Loans - Good idea?

The New Year is nearly here. A lot of us are thinking about our finances and how we can improve them in 2013. Personal loans play an important role for those who are trying to get out of debt quickly. Properly used, they can be an easy way to paying off high interest credit card debt. If they are used improperly, they are a fast ticket to a lower credit score.

Let’s keep in mind that bill consolidation, from the standpoint of a credit union, means eliminating debt, building credit scores, and creating a consumer solution that can be easily managed based on the member’s income. Depending upon the extent of the member’s debt, we will often ask that they close several of their outstanding credit cards. Why? It will do no good to consolidate their debt and have them run it back up. We will take a look at their credit and income to determine what credit can be retained by the member and what they would need to close in order to receive the loan or line of credit for the bill consolidation.

Often, CU’s will recommend a member gets credit counseling prior to their consolidation. Credit Counselors teach the member how to budget, to use their online banking to manage their finances, and help them understand the consequences of extensive debt and its effect on their credit scores. It can also be helpful if the credit union offers workshops on these subjects as Meriwest Credit Union does. For more info on personal lines of credit, click here.

Any bill consolidation should offer you a lower rate of interest than that which you are currently paying and a more affordable payment. Currently, for someone with a 740 FICO score, we can offer 15% on a personal bill consolidation loan or 10.50% on a personal line of credit. Please keep in mind the line of credit is adjustable and when rates go up, which they will, this rate could rise rather quickly.

One of the dangers of bill consolidation is irresponsible borrowers. A person can get a consolidation loan, consolidate their debts into a more reasonable and affordable alternative and then go out and acquire more debt. This completely defeats the purpose of bill consolidation and puts them on the fast track to a low credit score or worse.

We must also consider that closing out a credit card account can lower your credit score. Closing out cards that we have had for a long time will negatively effect our credit. When those credit lines are removed we lose the available line as part of our balance ratio calculation (for more info on this, see our blog “Your Fico Score, Mystery No More”) and we lose the history of managing that credit after a few months. Opening a new line can offset some of the FICO points lost to closing a line.

Don’t want to close the line of credit? You have some options. You can cut the card in half and simply not use it thus leaving the account open. If you are a disciplined person, you can lock your credit cards in a drawer and avoid using them; out of sight, out of mind.

Homeowners have another option available to them; the Home Equity Line of Credit or HELOC. The HELOC is line of credit based on your home’s equity. Typically, it has a lower rate than unsecured personal loans and may offer tax advantages for some homeowners. It is handy for home improvement, bill consolidation, and a myriad of other uses. As a matter of fact, Equity Lines of Credit are worthy of their own blog! We will have one for you on that next year.

Alternatives: There are offers from credit card vendors to transfer balances at a lower rate. They encourage borrowers to use a credit card check to pay off debt at other vendors and transfer that debt to their card. Consumers need to be mindful that the low interest rate offered on these is usually a teaser and may go up in time. Some cards may offer a lowered rate for the life of the transferred debt. These can be a pretty good deal provided the borrower is responsible and does not incur further debt during the pay off period. But don’t miss a payment! You could be subject to penalty interest and see your preferred low rate rise well above 18%.

Some things to consider before combining balances on another credit card:

-          Do you have adequate credit limit for the transfer?
-          Is the Introductory rate a temporary Teaser Rate or fixed for the term of payoff?
-          Is there a fee for the balance transfer? (this increases your cost of borrowing.)

Finally, before considering any consolidation, can you buckle down and get out of debt on your own without help? Can you rearrange your budget, be disciplined in your spending, and commit your spare dollars to paying off your debt? If one eats out for lunch everyday, it can cost over $35 a week. Bringing a lunch from home can save $100 a month. That money can go a long way toward paying off debt. On any credit card or loan, you can make larger payments and any amount you pay over your monthly interest gets credited against your principle, thus reducing the amount of interest you will pay the next month. Keep that cycle up and you will pay off your debts a lot faster.

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Reality Based Budgets for Teens and College Students – Jan. 16th
Our next Financial Education Workshop will be Reality Based Budgets for Teens and College Students. It is a post college simulation of renting an apartment, buying a car, and developing a spending and savings plan. It is a fun and interactive session for the whole family and really opens the door to discussions about managing money. If this is something you or a member of your family needs, please feel free to join us. These workshops are open to the public.

Reality Based Budgets
6:30pm January 16th at our Chesbro Main Office Location
5615 Chesbro Ave, San Jose CA 95123

Please RSVP with

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Hungry for more information on Money Management? Check out Len Penzo’s Financial Blog. Len provides excellent financial insights with a sense of humor.

Friday, December 14, 2012

Managing Holiday Credit Card Debt

Imagine yourself at a department store. You are approaching the check out. How are you going to pay for this purchase? Are you using your debit card because you planned your holiday spending? Or are you using your credit cards because your only plan is to spend and eventually pay it back?

When it comes down to holiday spending, we have a choice.

Choice #1: We can go into the holidays financially blind and spend to our heart’s content and put our heads in the sand and deal with it in the New Year. This is the way a lot of people approach the holidays and they pay for it monetarily and emotionally. Not only that, but their credit scores take a hit as their credit card balances rise. Their monthly costs go up because the minimum payments on their cards increase due to larger balances. This reduces their spending power until they pay off some of that holiday debt!

Choice #2: Go into the holidays with a spending plan that let’s you buy thoughtful gifts for your family and friends but does not allow you to break the bank. That is really the best course of action. A plan is always better than winging it and winging it with money is never a good idea. To make this action effective, you have to save before the holidays come. Set up an automatic transfer from your checking to a savings account.

Next year in January, you may want to open a “Christmas or Holiday Club” account for your holiday savings if your bank or credit union still offers that. The old club accounts had money automatically transferred from your checking account and was cashed in before the holidays and paid out to the accountholder to pay for gifts. Lacking a “Christmas Club” type of account? Open a savings especially for your holiday spending and set up an automatic transfer from your checking account each month. The automatic transfer happens without any action on your part. Just remember to enter it in your check register or monitor your online banking so you don’t overdraw your checking. When the holidays are here, draw the funds from your savings and spend it to your heart’s content.

If you must use credit to pay for your gift giving, let’s consider some things that might save us some money. Let’s assume you plan to pay this newly incurred balance off in six months. How much do you plan to spend on gifts? That’s the starting point. Take that amount and divide it by six and add that to your current monthly payment on that card. Can you afford that payment monthly for the next six months? Then you may have the right amount to spend on gifts. Is it too high? You need to adjust your spending plan, not your time horizon for pay off! Remember, extending the pay off time for any balance adds more interest to your debt. Paying interest is like renting money. Who benefits when you pay interest? Certainly not me or you. The bank does! If this sounds like a good idea, you use way too much credit and need an intervention!

But, if you really like making that monthly payment and the cost is no object for you, then you might be more inclined to take Choice #1.

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Our next financial education workshop will be “Real World Budgets for Teens” and will be presented at our Chesbro Main Office on January 16th at 6:30pm. Real World Budgets takes a teen and their parents thru a post college simulation of managing money, a job, and the payments that come with independence. I hope you can join us.

Please RSVP with Greg Meyer at or 408-365-6328.

Click here for a list of all of our financial education offerings.

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