Credit card debt or personal loan? How to choose.

Credit card debt is dogging this reader – one of 10 questions in my readers' mailbag.

John Nordell / The Christian Science Monitor / File
Mailboxes along Burpee Hill Road in New London, N.H. One of this week's questions in the readers mailbag: If the interest rate on my credit card debt is high, should I consider a personal loan instead?

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Personal loans or credit cards
2. Maximizing savings return
3. Conflicted about parenthood
4. Education or savings
5. Motivating a twentysomething
6. Piano tools
7. Mobile home mortgage problem
8. Netflix and Hulu?
9. DIY oil changes
10. Student loans or down payment?

This past weekend, we celebrated our son’s fifth birthday by having a party with several of his friends. His grandparents and aunt also visited and he received quite a few presents.

I asked him when he woke up this morning what his favorite birthday memory was and he said that it was playing games and having dinner with just the five of us, after the friends and extended family had left.

Funny thing, it was my best memory, too.

Q1: Personal loans or credit cards
I have 2 fairly high interest rate credit cards due to needing emergency car repairs, one through Bridgestone and the other through Goodyear. The Goodyear card has about $1,200 on it, with deferred interest until February 2011. When the promotion expires, the APR will be 24.99%. The Bridgestone card has approximately $560 on it, and currently has an APR of 22.8%.

I am making the monthly payments, paying slightly over the minimum amount required, but I doubt I’ll be able to get the Goodyear card paid off before the promotion ends. Would it make sense to look into taking out a personal loan of $2,000, paying the cards off, and then repaying the loan over 2 or 3 years? And do you have any idea what kind of terms I’d be looking at for the personal loan?
- Daniel

It doesn’t hurt to seek out any method you can to reduce the interest rates on those cards. However, without some sort of collateral, you’re likely not going to be able to reduce the rates by much.

I would suggest looking at two options. First, are there any balance transfer offers available on other cards that give you a period of 0% interest? Second, are there any personal loan offers available at your local credit union? Both of these likely rely on having good credit. The second option may require you to have some form of collateral for the loan.

I would recommend avoiding borrowing money from family (loans between family members have a tendency to turn nasty).

Q2: Maximizing savings return
In addition to my general savings account, I have two other savings accounts in my ING account – an emergency fund and a fund to buy a home with in the future. I’m wondering if my ING account earning 1.1% interest is actually the best place to keep these accounts. The emergency fund is fully funded, so I won’t need to add money from it anytime in the future (and hopefully won’t need to withdraw any time soon, but you never know). I have no plans to be withdrawing from my condo fund in the near future, but will be adding money every month, so I’d like it to be simple to add additional money to. I’m trying to minimize if possible the number of different accounts I have, so I don’t think I’m interested in opening another savings account with a different bank to just get an additional fraction of a percentage point interest. Do you have any suggestions for other places to keep my money to maximize the return on it? If it matters, the emergency fund has $10,000 and the condo fund has about $8,000.
- Andrea

You can absolutely seek out banks that offer a better interest rate. One place to shop around for such rates is Bankrate.

There are two catches to such shopping around, though. First, if you’re with a bank that has good customer service (and ING Direct certainly does), you’re likely to meet a bank that has awful customer service in this process and the interaction can be really difficult. Many banks have long waiting periods, substandard online banking, extremely poor customer service help, and other drawbacks.

The second drawback is that many banks offer “teaser” rates that only work for a short while or have other stipulations attached to achieving them, such as a balance or a transaction requirement. Beyond that, many banks often shuffle their rates, adjusting them up and down all the time in an effort to get new customer attention.

I generally find that unless I’m blowing my previous rates out of the water by at least a percentage point (i.e. 2% instead of 1%), it’s not worth the effort and attention I have to put into rate hopping.

Q3: Conflicted about parenthood
I’ve recently turned 31. I have a stable job that I enjoy and, after moving around for a while, I have finally found a part of the country that I love. I’ve had a few serious relationships in the past and while they have all ended well…well, they have all ended. As I find myself on the market again (so to speak) what limits me time and again is that I don’t want kids. I actually enjoy spending time around kids but every time I think about having them the rational part of my brain turns into overdrive and rehashes a litany of reasons not to. I suppose I just don’t have the paternal instinct that some are born with. For a long time this was fine enough but once again I have met a wonderful woman who is compatible with me in so many ways that matter, but who wants to start a family.

I gather from reading old entries that you’ve long known you wanted to be a parent and I was hoping you could share you experiences with that decision and the positives of parenting. So much of what we seem to read about are the negatives.
- David

People hear about the negatives often because they’re easier to rant about, frankly. It’s a lot harder to talk about the positives of parenting in a way that makes sense to people who are not parents without coming off like a loon.

I like to describe it this way. The negatives of parenting usually appear big – your child has a huge public meltdown or there are discipline issues or something like that. The positives are much smaller – it’s those many, many interactions throughout a day where you see a child learning something new or growing in some fashion or simply exhibiting a positive behavior or expressing something.

Those positives are usually tiny and often hard to explain, but they add up quickly because a day in which you’re paying attention to your child is loaded with them.

A big part of the reason I wanted to be a parent is because when I look back on many of the good memories of my life, a lot of them are just simple moments I spent with my own parents, where I felt genuinely safe and happy and, often, I felt like I could do anything. As I reached adulthood, I simply wanted to be on the other end of those moments.

Q4: Education or savings
I am single, and am thirty years old. My money management up to now hasn’t been great and I have few savings.

I have never been to university and would now like to rectify my lack of education. I have been looking at qualifications in Business Administration with each of the 2 levels being broadly similar to a year at university. After successful completion of the two levels many UK universities accept students directly on to the last year of a 3 year degree.

These qualifications can be studied part time by distance learning so would fit in with my work schedule. At present I work in an office job and earn around 18000 euros a year after tax. To do both levels will cost around 4000 euro which I will be able to pay as I study. If I decide not to continue studying both level 1 and 2 are stand alone qualifications that are valued by employers in their own right. The final year at university will probably cost around 3000 if I choose distance learning.

If I decide to go ahead and study it is unlikely that I will be able to save any money for the three to four years that it will take to finish everything. My question is – Would it be better to save the money first and wait a while before beginning to study, or to pay as I go and worry about savings later?
- Douglas

For me, the key to this whole decision comes down to the fact that you’re single and unencumbered with the requirements of a life partner or children. Because of that, I think you should go for the education sooner rather than later.

Why’s that? The best time in your life to get an education is when you’re single and you’re also seeing why that education is valuable. You’re not tied down with domestic responsibilities, but you also have a good grip on the importance of nailing that education. People younger than you often fall into not knowing how valuable the education is, while others are encumbered with a spouse or a child that makes such choices that much harder.

Now is your time to chase it. Go for it, before other life commitments tie you down.

Q5: Motivating a twentysomething
I have a 26 year-old nephew who has his AA degree, has kind of been drifting for the last 6 years or so, living at home with his mom and stepdad, no job other than helping out with family work/home remodeling, etc. He just can’t seem to figure out what he wants to do with his life, and living at home is not helping him–no reason to move on. He has recently thought about joining the military but is not sure it is for him. I’ve tried to steer him toward job counseling, possibly finishing school to get his bachelor’s degree, but am not sure what else I can do to help. Do you have any advice or resources that you recommend? I want to help him, but not enable him to stay with the status quo.
- Amy

At this point, after six years of trying to lead a horse to water, you can’t help. He has to help himself. The only help you can provide is to push him out the door.

My suggestion would be to set a very clear deadline where you expect him to be independent – and stick to it. Make it clear that he needs to move on to some degree of independence within, say, a year, and set a firm date for it. He’ll have to have a job and an apartment by then or he’s going to be homeless.

If the idea of that kind of ultimatum scares you and makes you not want to do it, then congratulations – you’ve got yourself a houseguest for the rest of your life!

Q6: Piano tools
What resources and methods are you using to learn the piano.
- Scott

Since February, I’ve been taking weekly private lessons with a local piano teacher with very reasonable rates. I’ve been practicing at home with a used keyboard, though I’ve been on the lookout for a good electronic piano for a while now.

Most of my material was either given to me by my teacher or gifted by friends or Simple Dollar readers. The primary book for instruction I’ve used to this point has been Alfred’s Self-Teaching Adult Piano Course.

I’ve also been downloading easy arrangements of songs from sites like EasyByte, which have been very helpful at my beginner level in teaching me how to read music while playing.

Q7: Mobile home mortgage problem
In March 2001, I moved into a 1979 single-wide mobile home, which was owned by my brother. It had been remodeled inside and out so you could not tell it was that old. He sold it to me for $23,000 which I’ve been paying on since then. Currently, I still owe approximately $11,000…and still 5 years on the mortgage.

Something I have found out in the last year or so is that he remodeled the inside and outside but NOT what was inside the walls or under the floor. The wiring is going bad, the furnace hasn’t worked in a year (I’m in Ohio) and the floor is starting to give way from an under the floor water leak. I have no money to fix this since I’m trying to finish repaying my credit card debt. I also don’t want to sink any more money into the place. It’s not worth it.

My question is – how do I get out of this mortgage? Is foreclosure the only way? People have told me to sell it, but there is no way I can get $11,000 out of it and I also don’t want to have the responsibility of selling it to someone when it most likely could go up in flames at any moment. I’m afraid to really live there any longer, so I’m in the process of packing to move into an apt.
- Dee

If you want completely out of the mortgage quickly, foreclosure is your only option, but it will wreck your credit for several years.

I’m going to guess that you didn’t have the trailer inspected before you purchased it. Did you have any sort of written statement regarding the condition of the trailer before you purchased it? Without this kind of evidence, it would be hard to get any sort of legal action against your brother and you may be outside of the statutes of limitation in your state anyway.

My back-of-the-envelope math tells me that you’re making monthly payments somewhere on the order of $300 a month for the mortgage, and it sounds like that continuing to make those payments to preserve your credit would be extremely financially difficult for you. The honest thing to do is to just finish off the payments. However, my suggestion would be that if you’re considering walking away from the trailer, sign an apartment lease before you do so that you can get your credit checked and get into the apartment before your credit is destroyed.

Q8: Netflix and Hulu?
I read the response to the person agonizing over dropping cable for Netflix on your Nov 4 post. My suggestion – add (free) to the entertainment mix, and you get the best of both worlds. Next-day satisfaction for popular shows with Hulu, and the deep variety and reliability of Netflix. If they can’t stand the small screen format, Hulu Plus ($9.99/month) can stream to Xbox Live or a web-ready Blu-Ray player. And Netflix streams to both for free as well, if you already have a membership.
- Andrew

There are several options for people considering abandoning cable or satellite for Netflix.

Hulu is certainly one option, as it offers current episodes of a lot of different popular television series. Beyond that, the websites of many television networks also offer the capacity to watch episodes of current series on demand shortly after airing, though they usually don’t have full archives of the series up for viewing.

As for sports programming, many sports leagues and conferences are beginning to offer streaming video online as well. For the 2010 season, I used MLB TV to follow my beloved Cubs for a pretty cheap price. Check the website of your favorite sports league or conference to see what they offer.

Q9: DIY oil changes
Would you recommend learning how to do oil changes yourself? I’ve been told by someone that does this, that it doesn’t really save money. Are there any other basic maintenance procedures that you would recommend learning to do on your own instead of taking the car to a mechanic? I know how to top up the fluids and pump my gas, that’s about it!
- Christine

It is cheaper to do your own oil changes (all you have to do is buy the oil) and it’s very easy, but there’s a time commitment involved in doing it. It will take you half an hour or so, plus you’ll have to wait in the middle for your oil to fully drain.

It’s really easy to do and the full instructions you need are in your car’s manual, which is likely in your glove box. You can also watch a YouTube video if you’re more of a visual learner.

Most oil change shops will dispose of old oil for you at no cost, so the only equipment you need is a pan to collect the dirty oil in, the right type of oil for your car (found in the manual), a few rags, and a funnel.

Q10: Student loans or down payment?
My wife and I accumulated quite a student loan debt load in each earning a bachelor’s degree plus a master’s for myself– about $140,000 or so. While this is quite alot, this is our only debt, and our monthly payments are within our means and we pay extra where we can– we’re at about $110,000 left 3 years out of school. However, my main question involves the approximately $15,000 we currently have in savings as an emergency-fund/beginning-of-down-payment. We add about $200-300 to this pot every month while still paying at least a little extra towards the student loans. We have a 2-year old daughter, and we have long wanted a house and would like to buy within the next 1-3 years, if we can. What would you suggest we do with windfalls or any other extra money we get? So far, for example, if we’ve come upon, say, a $1,000 windfall, we’d put about $500-600 to our debts, then throw a few hundred to our savings as well. A loose goal would be to continue paying as much as we reasonably can towards the loans, while continuing to pad our savings until we get to something like $25,000– at which point we could use $15-20k as down payment on a reasonable mortgage for us (about $200,000 would give us monthly payments in the range of what we currently pay on rent). This would still leave us surplus in our budget to then hopefully kick our debt repayment into high gear. Thoughts?
- Nick

First of all, good work on getting your finances going in the right direction. You’re certainly making positive moves here.

However, your desire to get into a house sooner rather than later will cost you a lot more over the long haul than waiting until all of your finances are in order.

The big issue is that if you don’t have a 20% down payment, you’re either going to be taking out a higher interest loan to make up your shortfall on the down payment or you’re going to have to take out mortgage insurance – the lender will require it.

My suggestion would be that if your only debt is student loans that you’ve consolidated and locked in at a low rate (and if you haven’t done that, do it – now), I would move to minimum payments on those debts and instead sock away for that down payment. Put any and all windfalls into your down payment savings and shoot for getting to that 20% mark as soon as possible. This will have a huge impact on your total debt, interest rate, and monthly payments when you take out a mortgage.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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