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I Make My Credit Cards Payments But My Bank Doesn’t Want To Give Me A Personal Loan to Pay them Off

We noticed this situation several times: we have an individual who had $10,000 on his credit cards, they are all maxed out but he still pays the minimum payment on time. He is now starting to have a hard time paying them off and goes to the bank for a personal loan in order to consolidate his debts.

Unfortunately for him, the bank turns down his credit application. There is a logic problem: if he is able to make payments at a 18% interest rate, how come would he not be able make a payment on a personal loan at 9%?

Negative Net Worth

Making payments on time is surely a good thing to do, however, this is not the only criterion used by banks. If you have a negative net worth (more debts/financial obligations than assets), they might be reluctant to consolidate all your debts and take the risk on their side. A negative net worth shows that you are technically bankrupt. If your creditors were to claim their dues, you would not be able to pay them off and would be forced to declare bankruptcy.

Late payments in the past

You might be on time right now but there is a strong possibility that you missed a few payments in the past since you have so many credit cards and such high balance to pay off. Late payments are another sign that you might encounter difficulties meeting your financial obligation in the future.

Maxed out credit

If all your credit cards show maxed out credit this is another sign that you are having problem managing your revolving credit. Therefore, your credit score will drop and banks will not lend you anymore money. The problem is that banks often work with trends and statistics. Their experience in credit showed them that people with maxed out credit cards will continue their spending habits after their consolidation. They will then show more maxed out credit cards two years after they did a consolidation loan.

In order to get a personal loan to consolidate your debt, you must show good credit management abilities. Most people ask for a consolidation loan when they can’t afford to pay their credit cards. Don’t wait that long, apply now while you still have a good credit bureau.

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9 Comments

Money Minder  on November 27th, 2008

When I was a banker, I underwrote a lot of loans. Banks look at debt consolidation as risky for them. If the bank is only currently exposed to a small percentage of the client’s debt through one credit card, their position is safer than if they were to grant the loan and take on the risk of all the outstanding debt with all the creditors. This is more true in the current lending environment than ever before.

Clients don’t usually understand this. Logically they think it makes sense that the bank would want to help them lower their payments and therefore ensure that the payments continue. This is only true if you are consolidating several debts which all have the same lender (i.e. a credit card, unsecured line of credit and loan already with the same institution).

polymath22  on November 28th, 2008

i think your “FULL RSS FEED” button is linked to the wrong thing. it lands me on a mediacom search results page (?)

The Financial Blogger | Financial Ramblings  on November 29th, 2008

[...] out how a bank can’t refuse a personal loan to pay off your credit cards even though you are making your pay… at The Credit [...]

cjop  on November 29th, 2008

Easy answer. If you pay off 10k in credit card debt guess what! You have 10k in available credit. Run that up to the max again and you are now making payments against 20k. Simple answer if you ask me.

CTB  on November 29th, 2008

Polymath22;
thx for the notification. I,ll make the correction shortly.

CJOP;
bank still have the possibility of canceling credit cards, they should do it these days ;-)

Carnival of Personal Finance, Cyber Monday 2008 Edition | Mighty Bargain Hunter  on December 1st, 2008

[...] Credit Toolbox discusses some aspects of refinancing consumer debt. [...]

A Case Against Debt Consolidation and 3.2 Beer  on December 2nd, 2008

[...] read an interesting post on TheCreditToolBox.com recently about why a bank might not give you a debt consolidation loan. The gist is that, if I have an average interest rate of 18% and a clean payment history, why [...]

Personal Loans, Money Talk, Holiday Cash  on December 3rd, 2008

[...] The Credit Toolbox: My Bank Doesn’t Want To Give Me A Personal Loan [...]

Dusty  on December 6th, 2008

Using credit cards is quite simply a financial trap. Creditors are trying to squeeze out every penny from you that they possibly can. Try and find a good debt reduction plan (ie Dave Ramsey’s Total Money Makeover) and then NEVER get into debt again.

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