The wisdom of getting a loan to payoff credit cards depends on many factors. All kinds of people end up with credit cards. Issuing credit cards can be very profitable business. People with good credit histories and high credit scores can be attracted with low interest cards or cards with “cash back” awards programs. People with flawed credit histories and low rated scores can be served by assuring that the interest rates and fees charged are high enough to cover anticipated defaults. Either way the card issuer makes money.

When Debt Consolidation Loans Make Sense for Individuals with High Credit Scores

Getting a loan to payoff credit cards can make sense even for people with the means to continue to make on-time payments on all of their cards:

• Since credit card debts are unsecured, even the most credit worthy borrower can expect to pay at least a 10% annual interest rate.
• Unforeseen emergencies, expensive vacations, or major purchases may result in credit card balances that are higher than the card holder desires.
• Even if the balances could be paid down from savings, it may be in the cardholder’s best interest to leave savings untouched, and pay their credit card balances down to a more normal level with a bank or credit union low interest secured installment loan.
• Sophisticated credit users understand that credit rating agencies look favorably upon credit card users that keep a number of credit cards active but with balances low relative to credit limits.
• They also understand that their credit report will be further improved by successfully paying off the installment loan.

When Debt Consolidation Loans Make Sense for Individuals with Low Credit Scores

For individuals with damaged credit histories, the wisdom of getting a loan to payoff credit cards depends on a number of factors. People end up with low credit scores for a variety of reasons. In some cases the issue is an unplanned and prolonged reduction in family income. In the majority of cases, however, the underlying cause of high credit card balances and low credit scores is attributable to poor money management skills and/or lack of spending discipline. Whatever the cause, low credit scores generally make low interest loans from banks and credit unions impossible to get, so borrowers are forced seek loans from specialty lending organizations that charge much higher interest rates and fees. Here are some circumstances in which getting a loan to payoff credit cards, even under less than desirable circumstances, may be a wise decision:

• When analysis of an individual’s total debt burden indicates the presence of one or two credit cards with high balances, high interest rates, and high minimum monthly payments;
• And the individual’s income only provides enough money for minimum payments, the long-term cost of totally repaying those cards can be extremely high. A consumer installment loan can be used to consolidate problem credit card balances;
• Installment loan may extend the repayment period out to 3 to 5 years, which may still be earlier than would be possible without the consolidation loan;
• If the borrower is able to attain a secured loan, the interest rate will almost certainly be lower, and the total cost of paying off the problem credit card balances will be considerably lower;
• When analysis of an individual or family’s debt burden and income indicates that the current debt burden is unsustainable or spiraling upward, a more drastic form of debt consolidation may be necessary;
• As an example, there are legitimate non-bank lenders that will offer an individual with serious debt problems a contract (sometimes called a Debt Management Plan or DMP) under which the borrower agrees to make a single affordable payment to the company;
• The company then negotiates with all the borrower’s creditors to attain lower interest rates, forgiveness of accrued late payment penalty charges, and even forgiveness of a portion of the balance owed. The company uses the promise of a portion of the monthly payment the company collects as an incentive for creditors to make concessions;
• There may also be circumstances under which an individual whose credit score was affected by past unplanned emergencies may use that consolidation loans with manageable monthly payments as a tool to improve his or her credit history, and eventually their credit score.

When Debt Consolidation Loans Do More Harm Than Good

The sad fact is that about 80% of Americans getting a loan to payoff credit cards are worse off financially five years after the loan than they were when they signed the initial loan contract. Key reasons for this sad statistic include:

• Lenders who extend high interest debt consolidation loans to distressed borrowers that the lenders know are probably not in the borrower’s best interest;
• Borrowers who lack the financial management skills needed to understand the likely consequences of the unrealistic loan contracts the above lenders offer them;
• Borrowers who act out of desperation and accept the first debt consolidation loan anyone is willing to offer them;
• Borrowers who fail to rein in their undisciplined spending habits, that got them into trouble in the first place;
• Borrowers who don’t take the time to determine whether getting a loan to payoff credit cards creates an economic advantage or is even necessary.

Final Thoughts

There are many circumstances in which getting a loan to payoff credit cards makes good financial sense.  If you get turned down for a low interest loan from a bank or credit union, but you really need a consolidation loan from somewhere, get help from a qualified credit counselor before jumping into the potentially treacherous waters of the sub-prime lender market.