Personal Finance

Consolidated loan or continue to pay credit cards

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  • Nov 19th, 2015 8:25 pm
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Deal Addict
Apr 13, 2015
1108 posts
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UrbanPoet wrote: Fair enough. It can be tweaked.
Say... 2-3 credit cards with a $5k limit. Work it out for the situation.
You can lower available revolving credit which is favorable in mtg applications.
Different for everybody. Two of my cards are being used for balance transfers - cash used for investing/trading. Some shopping cash back maximized with Amex1, some maximized with Amex2, sone maximized with MasterCard 1, some with MasterCard 2. That's 6 well used cards, with average cash back over 3%.
Deal Addict
Apr 4, 2013
1274 posts
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RyanS219 wrote: Looking for some advice. I'm in the process of arranging my financials in order to buy a house (likely within 1 year). Between my Wife and I we have some accumulated credit card debt that we have been aggressively paying down. In a conversation with a local credit union, they suggested consolidating the debt into one payment and paying less interest. That obviously makes sense, however, in conversations I have had with mortgage brokers, they mentioned that loan payments are obviously taken into account when applying for a mortgage.

My question is if I take out a loan to consolidate debt, regardless of what portion of the loan is remaining my payment will still be the same as the first day of loan. If I continue to aggressively pay down credit cards my payments will continually report as lower and lower each time (even though I'm paying a much higher amount towards the balance). From a mortgage point of view wouldn't the credit card lower payments look better even though both balances could essentially be the same?
When you write, "wouldn't the credit card lower payments look better", what exactly do you mean? Are you wondering whether you will qualify for a larger mortgage?

From a mortgage qualification point of view, the lender will look at your credit balance and your minimum payment. After all, your obligation is to make your minimum payment on time and as agreed. If your goal is to maximize the amount of mortgage that you will qualify for, then yes, it makes much more sense to continue what you are doing. By aggressively paying down the credit cards now, you may be in a much better position to have much lower balances and a much lower minimum monthly payments on your credit cards when you apply for a mortgage a year from now.

I would also caution against consolidating those credit cards now because you are in fact planning to buy a house. Consolidating credit cards now would leave those credit limits open for use later. The average Canadian takes on an additional $20,000 in new debt after buying a home. They feel confident after buying a home, and let's face it, we need more stuff when we have a home. In all likelihood, after buying your home, you would find yourself funding this new debt with your credit cards. There is a very high likelihood that you would fall prey to the number one reason why debt consolidation does not work - the fact that you have only transferred the debt and not actually paid it. In nearly 80% of all cases of debt consolidation, the debt comes back. This means that in the majority of cases, people who consolidate their debts are actually taking the first step to increasing their debt and not eliminating it.
Deal Addict
Apr 13, 2015
1108 posts
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SeanGL wrote: If you think consolidation is the route, it would be great if you could give us a try! We're Grow (formerly known as Grouplend) and our application process only takes 1 minute and will not impact your credit score.

We hold RFD's community in the highest regards and it would be really exciting if we could get any feedback you may have.
Sean, I really appreciate the loan you gave me, however I think that we need to get honest now about a bit of problem that may be damaging to the OP in this case, or to anybody else in a similar situation.

You are not yet able to report the loan to the credit bureaus due to a critical mass issue. You have informed me that this would happen by the end of the year, however based on what MikeMike has told me, I will NOT get the benefit of any of my past good history with you. It will be as if a new loan has been registered when you finally manage to post to the credit bureau.

This is potentially very damaging to the OP, if a new loan suddenly posts to the credit bureau just as he is attempting to negotiate his mortgage. After all, we don't know with certainty when you will finally get this properly arranged with the credit bureaus.

What is the progress on this issue? I'm sorry to raise this issue publicly, and I hope its not damaging to you, but I think RFD members who use your service deserve to know ahead of time what will happen to their credit report.

**** Please note everybody, that aside from this issue, I have nothing but positive to report about Sean and Grouplend/Grow.
Deal Addict
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Dec 11, 2012
4036 posts
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UrbanPoet wrote: You can mitigate this by getting the loan and closing off all your credit cards except 1 or 2.

My credit situation is very simple...
1 line of credit $15000 limit (backup loan facility)
1 mastercard $14000 limit (main card)
1 visa with $500 limit (back up in case there is a situation where they only accept Visa).

I got some MBNA card kicking around... Kinda useless since they dropped my limit to $300 for some reason.
no offense but closing your CCs without lowering your amount owning will affect your credit utilization ratio. credit utilization amount to about 30% in determining credit worthiness. imo it mite be worse off than no closing any credit accounts.
Deal Addict
Feb 6, 2014
2174 posts
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St. Johns
So if my minimum payment is currently $300 for the credit cards, and I consolidate into a loan where the payment is now $500, wouldn't that hurt my ability to get a mortgage? I appreciate that the consolidation certainly speeds up the process and allows me to reduce credit card limits (close accounts) but to a mortgage lender my payment obligations have increased making my application less attractive.
Banned
Oct 31, 2015
178 posts
40 upvotes
RyanS219 wrote: So if my minimum payment is currently $300 for the credit cards, and I consolidate into a loan where the payment is now $500, wouldn't that hurt my ability to get a mortgage? I appreciate that the consolidation certainly speeds up the process and allows me to reduce credit card limits (close accounts) but to a mortgage lender my payment obligations have increased making my application less attractive.
You definitely don't want to have higher payments. That would do you more harm than good.
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Apr 20, 2011
5310 posts
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scotsum wrote: no offense but closing your CCs without lowering your amount owning will affect your credit utilization ratio. credit utilization amount to about 30% in determining credit worthiness. imo it mite be worse off than no closing any credit accounts.
Especially the oldest ones, and anything without an annual fee, should be kept even if it is not used.
Deal Addict
Apr 4, 2013
1274 posts
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RyanS219 wrote: So if my minimum payment is currently $300 for the credit cards, and I consolidate into a loan where the payment is now $500, wouldn't that hurt my ability to get a mortgage? I appreciate that the consolidation certainly speeds up the process and allows me to reduce credit card limits (close accounts) but to a mortgage lender my payment obligations have increased making my application less attractive.
The higher payment will lower the total mortgage amount the you can receive. There are 2 ratios that mortgage lenders consider when reviewing your mortgage application: your housing costs as a percentage of your income and your total debts (including your new house and mortgage) as a percentage of your income. A higher payment on the consolidation loan will increase your total debt ratio. If this ratio goes over the maximum threshold, you either get rid of some of the debt or you reduce your mortgage amount.
Deal Addict
Feb 6, 2014
2174 posts
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St. Johns
creditcardjunkie wrote: You definitely don't want to have higher payments. That would do you more harm than good.
Indeed, but I cannot see any circumstance where a consolidation payment would be lower than a minimum credit card payment (unless stretched out over a number of years). I believe the rates on my card are 12-13% so even with a loan at 5% it would need to be taken out over 10 years (which is insane) to achieve a similar payment. While interest rate is definitely lower, the payment will inevitably be higher.

I anticipate paying off the debt in approximately the same time frame regardless of whatever method i follow (continue with cc's payments or convert to loan) but of course i'll pay a little more interest with the credit cards. I just want to be sure that when I start the mortgage process i'm not restricted because of my debt payments.
Deal Addict
Apr 13, 2015
1108 posts
214 upvotes
RyanS219 wrote: Indeed, but I cannot see any circumstance where a consolidation payment would be lower than a minimum credit card payment (unless stretched out over a number of years). I believe the rates on my card are 12-13% so even with a loan at 5% it would need to be taken out over 10 years (which is insane) to achieve a similar payment. While interest rate is definitely lower, the payment will inevitably be higher.

I anticipate paying off the debt in approximately the same time frame regardless of whatever method i follow (continue with cc's payments or convert to loan) but of course i'll pay a little more interest with the credit cards. I just want to be sure that when I start the mortgage process i'm not restricted because of my debt payments.
Honestly, I wouldn't be getting a mortgage where $200 here and there makes it unaffordable or you can't qualify. You make the minimum only on CC debt, you'll be paying for the next 30 years. Get rid if it, and adjust your mortgage accordingly.
Deal Addict
Feb 6, 2014
2174 posts
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St. Johns
bruceh2015 wrote: Honestly, I wouldn't be getting a mortgage where $200 here and there makes it unaffordable or you can't qualify. You make the minimum only on CC debt, you'll be paying for the next 30 years. Get rid if it, and adjust your mortgage accordingly.
I agree, just using numbers as an example. I'm currently paying a lot more than minimum on the cards and figured a consolidation loan was a neat and tidy way of putting the revolving debt away. I have an appointment tomorrow so I'll see what they say.
Banned
Oct 31, 2015
178 posts
40 upvotes
RyanS219 wrote: Indeed, but I cannot see any circumstance where a consolidation payment would be lower than a minimum credit card payment (unless stretched out over a number of years). I believe the rates on my card are 12-13% so even with a loan at 5% it would need to be taken out over 10 years (which is insane) to achieve a similar payment. While interest rate is definitely lower, the payment will inevitably be higher.

I anticipate paying off the debt in approximately the same time frame regardless of whatever method i follow (continue with cc's payments or convert to loan) but of course i'll pay a little more interest with the credit cards. I just want to be sure that when I start the mortgage process i'm not restricted because of my debt payments.
Perhaps it's time to question whether buying a home is the right thing to do at this point.
Speaking totally what I would do if I were you, purchasing a home requires a down payment, correct?
How about taking that down payment and throwing it all at the debt? Hopefully paying it off depending on the down payment you have.
After debt is gone, start your savings up again for the down payment.
Yes this will set you back on the home purchase for a couple or few years, but it may work out better for you as real estate could go down by then.
The last thing you want to do is take a bunch of debt into a house purchase with you. That debt will only grow afterwards, mark my words.
Deal Addict
Apr 13, 2015
1108 posts
214 upvotes
creditcardjunkie wrote: Perhaps it's time to question whether buying a home is the right thing to do at this point.
Speaking totally what I would do if I were you, purchasing a home requires a down payment, correct?
How about taking that down payment and throwing it all at the debt? Hopefully paying it off depending on the down payment you have.
After debt is gone, start your savings up again for the down payment.
Yes this will set you back on the home purchase for a couple or few years, but it may work out better for you as real estate could go down by then.
The last thing you want to do is take a bunch of debt into a house purchase with you. That debt will only grow afterwards, mark my words.

A very good point.

OP, looking at your numbers: You said $300 is your minimum payment? At 13% interest, where minimum payment is typically interest + $10 ( at least it is on my cards ), that is $26,000 of credit card debt. Yikes. You really don't want to be walking into a new house and mortgage with all of that, nor do you want to present with a mortgage application without a clear plan how you're going to get rid of all of that debt.
Deal Addict
Feb 6, 2014
2174 posts
547 upvotes
St. Johns
bruceh2015 wrote: A very good point.

OP, looking at your numbers: You said $300 is your minimum payment? At 13% interest, where minimum payment is typically interest + $10 ( at least it is on my cards ), that is $26,000 of credit card debt. Yikes. You really don't want to be walking into a new house and mortgage with all of that, nor do you want to present with a mortgage application without a clear plan how you're going to get rid of all of that debt.
The plan was never to walk into a mortgage with that kind of debt! The plan was to aggressively pay down debt until I get to a comfortable point where there is minimal debt. The only question is what route would be better consolidation or continuing with credit card payments. It is likely that by the end of next year that debt will be significantly lower at which point I could consider whether I was financially ready to commit to a mortgage.
Deal Addict
Apr 13, 2015
1108 posts
214 upvotes
RyanS219 wrote: The plan was never to walk into a mortgage with that kind of debt! The plan was to aggressively pay down debt until I get to a comfortable point where there is minimal debt. The only question is what route would be better consolidation or continuing with credit card payments. It is likely that by the end of next year that debt will be significantly lower at which point I could consider whether I was financially ready to commit to a mortgage.
Fair enough.

Let's turn the problem around. How much do you owe, and how much can you afford to pay, right now?
Deal Addict
Feb 6, 2014
2174 posts
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St. Johns
We are looking to consolidate approximately $24,000 with minimum payments being about $300 a month. We are right now putting at least $900 a month towards the debt and in some cases substantially higher. My partner is a substitute teacher who has essentially taught every day this year. Any income gained from that job is almost entirely directed towards debt repayment (hence why we are aggressively paying debts).
Deal Addict
Apr 13, 2015
1108 posts
214 upvotes
RyanS219 wrote: We are looking to consolidate approximately $24,000 with minimum payments being about $300 a month. We are right now putting at least $900 a month towards the debt and in some cases substantially higher. My partner is a substitute teacher who has essentially taught every day this year. Any income gained from that job is almost entirely directed towards debt repayment (hence why we are aggressively paying debts).
Oh, that's easy. Consolidate your debt ( 3 year term), and delay your mortgage for one year, 2 years from now. Chances are great that you're debt will be paid off by the time you apply for your mortgage.
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Nov 2, 2013
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Edmonton, AB
RyanS219 wrote: We are looking to consolidate approximately $24,000 with minimum payments being about $300 a month. We are right now putting at least $900 a month towards the debt and in some cases substantially higher. My partner is a substitute teacher who has essentially taught every day this year. Any income gained from that job is almost entirely directed towards debt repayment (hence why we are aggressively paying debts).
Ouch...

Consolidated loan is probably your best bet in this scenario.
Accountant (Public Practice)
Deal Addict
Feb 6, 2014
2174 posts
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St. Johns
FirstGear wrote: Ouch...

Consolidated loan is probably your best bet in this scenario.
Yup pretty much. We took on a TON of debt moving across the country for work when I was in dire need. Can't say it wasn't worth it as I'm now back home with a dream job that pays really well. Wouldn't have gotten it without my prior work experience.

None the less it used to be much worse! Thankfully with some career success and aggressive debt repayment we are able to move in a much better direction.
Member
Mar 9, 2015
234 posts
102 upvotes
Aldergrove, BC
Keep paying down the debt but wait until the housing bubble pops before buying.

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