Intro to Debt Consolidation

Buying things on credit is the American way.

Many consumers don’t even carry cash; it’s safer and more convenient to swipe a card than to pull out cash and wait for change. If you lose your card, just call the bank and have the card reissued with a new number, no worries about losing cash and it being gone for good. You might want something now and payday’s not for another week; pull out your credit card, charge it, and pay for it later.

This is the mentality that has made it so easy for consumers to spend more than they would if they had to pay for everything when they actually had the money. Credit card accounts that have been charged to the max, personal loans for luxury items, and store credit cards at high interest rates can become unmanageable. Is there a quick and easy fix for this debt that’s gotten out of hand?

Debt consolidation may seem like the answer to all your problems. You can get a loan to pay off all your debts, and only have one due date and one payment a month to worry about.

Budgeting can be easier when you have one set amount to pay every month, and it can be more convenient to pay bills when all the other creditors are eliminated. The monthly payment will probably be lower than the total payments of the combined debts, possibly making debt consolidation the only affordable way for you to get back on track.

Whatever your reason for considering debt consolidation, think hard before you replace many little debts with one big debt. Debt consolidation is a sure signal that your debts are getting the best of you. Consolidating your debts can work for you only if you have the self-control and commitment to change your habits and quit the overspending that got you into this mess in the first place.

Will you have the discipline to not use your credit cards once they are all paid off? Many people see a zero balance on their account as an invitation to shop. If you get a loan to pay off your credit cards and then run them back up, you can easily end up with twice the amount of debt you were trying to get out of!

Avoid the temptation by closing high-interest store cards and all other unnecessary credit accounts. Keep one or two cards with great terms and only use them for a true emergency. A 50% Off Sale at your favorite store might get your heart racing, but it is not a true emergency!

Consider these ideas if you want to consolidate your debt:

Balance Transfer
You could transfer your balances to one low-interest credit card and pay this off on a strict schedule. Always pay the full balance or at least much more than the minimum payment when you can afford to; a twenty or fifty dollar payment on thousands of dollars in debt will hardly keep up with the accruing interest.

A 0% introductory rate can buy you some interest-free time. Take advantage of that by paying off as much as you can before the introductory rate period ends or you may find yourself swinging from card to card to chase those low rates, which could hurt your credit score by having too many short term credit accounts. Also make sure that the rates won’t become higher than what you were paying to begin with. Read and understand all the terms and conditions of any credit card before you apply.

Bank Loan
You could get a loan from your bank or credit union. You might even consider putting your automobile up as collateral if you can’t get an unsecured loan with them. They can usually offer rates much lower than your credit cards and department store credit account, and there may be an additional convenience factor if they withdrawal your payment automatically from your checking account.

Pay additional payments when you can - installment loans can take many years to pay off if you only pay the amount due each month. If you plan on doing this, avoid a loan that has prepayment penalties. Make sure you are aware of all the details of the loan before you sign.

Home-Equity Loan
Home-equity loans are a popular way for homeowners to consolidate their debts, but they carry a big risk. If you can’t make the payments, you risk losing your home! Home-equity loan interest rates are lower than other types of credit accounts, but the total amount of interest paid will be high since the payments are spread out over fifteen to thirty years.

Think hard before you decide to pay for clothes, nights out on the town, and other disposables with the equity in your home. There may be tax benefits, but sometimes not all the interest is deductible. Consult a tax professional to get all the answers before you make your decision.

Consolidating your debts with a home-equity loan could make the most sense financially if you are committed to starting fresh, but don’t use your home as collateral for a loan if you aren’t sure that you can follow a strict budget.

Credit Counseling
Credit counseling agencies can’t do anything that you can’t do for yourself, but if you find you need some direction, they might be able to help you get back on track before you get a loan to consolidate your debts. There are many credit counseling services available to you; some are legitimate agencies and some of them are outright scams.

Research any company before you agree to their services. Check with the Better Business Bureau and run from any company that has complaints. Be cautious of any company that wants to charge fees before services are provided. You can find a quality organization by contacting the National Foundation for Credit Counseling (NFCC) at www.nfcc.com. Founded in 1951, the NFCC is the nation’s largest nonprofit credit counseling network, and maintains a strict code of ethics.

A good credit counselor will help you draw up a budget, financially educate you, and require you to give up your credit cards. They may be able to help you negotiate better terms with your creditors. Just remember that you may receive negative marks on your credit if you end up paying less than the original payment; though they may accept a smaller payment, you are still not paying as originally agreed upon. Even if you decide to get a debt consolidation loan, the financial education you receive from a good agency will be valuable for your lifetime.

Bankruptcy
Bankruptcy may be an alternative once you’ve explored all your other options. Most people get a debt consolidation loan to avoid bankruptcy, but often this just puts off the inevitable if spending habits don’t change. Bankruptcy is not to be taken lightly; it stays on your credit report for up to ten years.

It’s hard to get new credit with a bankruptcy, but that may be just what you need anyway. After starting fresh, you can slowly improve your credit standing and eventually learn to take control of your spending and use credit wisely. You can possibly keep your home, an inexpensive car, and required personal items, but consult a good bankruptcy lawyer for all the details.

A new bankruptcy law passed in 2005 requires all bankruptcy filers to go through approved credit counseling so they can avoid getting into the same situation in the future. Bankruptcy is a last resort, but it may give you a chance to get your finances back in shape if you are committed to being responsible with your spending the next time around.

Check into all options and figure out what works for you.
Consolidating your debts isn’t always the answer. Getting new loans and credit cards to pay off debts may just be adding fuel to an already uncontrollable fire. Educate yourself and understand what using credit really costs. Live within your means and use discipline when you shop. It’s a lot of fun to get new things, but it’s an even better feeling when you have financial security and you own more than you owe. Just make a commitment to yourself to take control of your finances and make the wisest decision for your situation.