Finding yourself deep in debt can be a very frustrating experience. Sometimes, it can feel as though payments you make aren't helping — thanks mostly to high interest payments.
Jamie VanDyke and her husband, Michael, felt that way when they realized that they weren't making much headway on the $45,000 they owed.
"So much of each payment was going to pay interest," Jamie says. "We knew we'd be in debt for years and we didn't see much progress."
Jamie and Michael decided to create a repayment plan by consolidating their debt.
"We figured that we could get a better rate, and at least get all the debt in one place, making it easier to make payments," she says. "It took some time to make the strategy work, but we're on track to save about $80,000 in interest and be done with our debt much sooner."
Credit card debt continues to rise, and many consumers might wonder how Jamie and her husband were able to successfully get out of debt. Here's what the couple learned about debt consolidation as they put the strategy in place for them.
Drowning in debt
Like many people, Jamie and her husband didn't think a whole lot about the debt they amassed while going through college and starting their family. They met while stationed on an Army base, and after a while they moved to Idaho, where Jamie works as a health inspector and Michael teaches math.
Along the way, they amassed $45,000 in credit card and personal loan debt, along with a small amount in student loans.
"We looked at our huge payments each month, and the number we had to make and realized we weren't making any progress," says Jamie. The weight of their loans felt heavy.
So, the couple began considering their options.
They liked the idea of debt consolidation because it would streamline their payments. Besides, the credit card debt was especially painful.
After the running the numbers, they realized that if they just kept paying the minimums, it would take more than a decade to get rid of the debt, and they'd pay more than $80,000 in interest.
Qualifying for a debt consolidation loan
Getting a debt consolidation loan for $45,000 wasn't as easy as Jamie had hoped, however. She and her husband didn't have great credit, and it was hard to find a lender willing to give them an unsecured loan for so much money.
They spent more than a year struggling with payments while they worked to improve their credit scores. "It was disheartening at times," she says. "We had to meet this criteria. But in the end, we got there."
Both Jamie and Michael made phone calls, looked online, and eventually worked with USAA to qualify for an unsecured personal loan they could use to pay off their smaller debts.
Their debt consolidation personal loan was for five years, at 15% APR. They weren't thrilled with the interest rate, but it was still lower than what they were paying on their credit cards, and at the very least, it helped them gather all of the debt in one place.
Jamie pointed out that the monthly payment was only a couple hundred dollars less than what they were paying before, but each payment was more effective, and it gave her and her family peace of mind, knowing they were on the right track.
Switching to a HELOC
Jamie was surprised at the positive impact the debt consolidation loan had on her credit score. Because so many credit cards were paid off, and because both she and her husband didn't close the cards after paying them off, they got a huge boost to their credit utilization ratio, which accounts for about 30 percent of a credit score.
She and her husband had bought a home and lived in it with their three young children for several years before they started planning how to pay off debt. They decided that a home equity line of credit (HELOC) would probably suit their needs better than the personal loan.
"We saw a chance to essentially refinance our debt using home equity," says Jamie, "so we took it."
Getting the HELOC, however, wasn't as simple as walking into a bank. The roof on their family home needed to be replaced, and they had to wait until that work was complete. Additionally, they wanted to give their credit scores time to improve even further so they had a better chance of qualifying for a HELOC.
Finally, they got a HELOC through a local credit union. "Rather than just looking at our credit, they were willing to look at us," says Jamie. "They saw we had stable jobs, kids, and roots in the community. They got to know us, and were willing to give us a chance."
The HELOC offers a line of credit for 10 years at 7.5% APR, and only requires that they pay about $200 a month. However, they're committed to paying $500 a month in an effort to stay on track while still enjoying improved cash flow.
"We still have a little bit to go before we're debt-free, but we feel better knowing we can handle our payments and that there's an end in sight," says Jamie.
A brighter future after debt consolidation
For the most part, Jamie points out, a debt consolidation loan works best for people who have good credit.
"If you've already missed payments or your credit is in bad shape, you might not be able to get the loan you want," she says. "It was frustrating for us, and we had ok credit."
Additionally, she cautions that using a HELOC requires planning and discipline. She's a little worried about securing their debt with the house, but if the worst comes, there's enough equity in the home to sell it and have the debt paid off during the sale.
"We can't keep using the line of credit for other things, though," she says. "We have to stay focused on paying it off."
Jamie and Michael still use credit cards, but they use them as part of an overall budgeting strategy, paying them off at the end of each month. Keeping them open after paying them off with the original debt consolidation loan is what helped propel their credit scores even higher so they could qualify for an even lower rate with the HELOC.
"It's stressful to be making multiple payments each month without seeing much progress," Jamie says.
"It took some time to get everything in place, but now we only have one payment and it's lower. We're saving money and we feel much better about the future."