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Consolidate debt? Let's take a look

August 10, 2009 • June Walbert

 

Q: Is it better for me to consolidate our debt on a credit card with an interest rate of 9.9% or to take out a 3-year loan at 12% interest? Thank you for your help.

 

-Timothy, Vidor, Texas


A: Great question!  In order to illustrate, I’m going to assume you have $12,000 of credit card debt and are weighing the two options you highlighted.  First off, a 3-year, 12% loan would require a monthly payment just under $400.  If you can afford that type of payment each and every month, this might be a solid option.  I like that this strategy has a definite beginning and end date.  However, the risk is that you build back up your credit card debt that you consolidated and then end up with credit card debt and your “tried-to-consolidate” loan.  That’s bad news and often happens.  If you fear this scenario then I would opt for the lower-interest credit card.  If you make similar payments of about $400 per month, you’ll still end up debt free in three years (or less) and that is just plain good!  Plus, you would also save a little over $400 in interest over the higher interest rate consolidation loan.  No matter which direction you head, it should all start with a focus on the basics…living within your means.  Putting together a budget you can live with is the cornerstone of financial success. 

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USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor. The information is provided for informational purposes only and is not intended to substitute for obtaining professional financial advice. Please thoroughly research and seek professional representation before acting on any information you may have found in this article. This article is in no way attempts to provide advice that relates all personal circumstances.

Examples given are hypothetical illustrations and not an indication of the benefits or features of any USAA product. You should seek policies and advice based upon your own particular circumstances. Sample loans are for illustration purposes only and are not a rate quote, pre-approval, or commitment to lend.

June Walbert is a CERTIFIED FINANCIAL PLANNER TM practitioner with USAA Financial Planning Services, one of the USAA family of companies.

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