Ever get offers in the mail that promise to cut your debts dramatically and make you debt-free in only 48 months? I get them weekly and I am fascinated by the magnitude of the offers. Debt consolidation offers usually come in three different disguises all with variations on the theme. Let’s look at how you can use either of these three debt consolidation methods to your own advantage and let’s examine the some of the shortcomings of each.
The most common of these are credit card balance transfer offers followed by loan offers that roll all your debt into one payment, then come the debt consolidation companies who take over the responsibility of paying your credit card or other debt payments provided you send them a check once per month.
Credit card offers
You should know that credit card deals that offer balance transfers usually come with a few strings attached. Most cards require you to make all your transfers at the time you take up the offer. Another drawback is that most offers are made “up to” $5,000 or $10,000. You never know what you are getting until after the credit card company has run your credit, so don’t be surprised if you are unable to consolidate all your outstanding debt in one go.
The interest rates on credit cards with balance transfers are not all zero. There will often be an introductory period as short as six months, so read carefully to determine what rate will be applied to purchases and what rates are on offer after the grace period. They will often not be the same. A little known fact is that if you also use the balance transfer card for purchases, any payments you make will be applied to the higher rate item before it’s applied to the low-rate transferred item. But if you are using balance transfer credit cards for debt consolidation, it is unlikely you would want to make additional purchases if you are serious about getting your debt under control.
Credit cards that allow you to transfer your debt from other cards often have a fee attached. Most cards charge three percent of the value of the transfers. Others come with one-time fixed fees. Over the long run you will save interest charges by using these and you can calculate the interest saved and apply it to your debt payments. But you must make sure to pay on time as credit card issuers will raise your rate on a zero percent card to the default rate if you miss a payment date.
High interest rate loans
Debt consolidation offers are often made by finance companies who offer the prospect of lowering your monthly payments. We’ve all seen the TV ads that promise to lower your monthly debt payments by twenty, thirty or even forty percent. For some people, the thought of writing one check instead of keeping track of four or five separate debts is very attractive. It saves them the burden of remembering separate payment dates and amounts and they get to keep a little extra money in their pocket. The drawback, of course, is that finance companies and their like may charge you as much as 21% or higher to consolidate your credit card debt into one payment. You will save money in the short run but pay out more in interest charges in the long term.
Debt consolidation loans may work for you if you are willing to sacrifice the higher interest payments for a modicum of convenience. If you can’t summon the self-discipline to make those four or five individual debt payments it may be worth consolidating them. For one, you will run less risk of missing a few payment dates and having late debt payment charges pile up on you.
Debt consolidators...some do some don’t
Most debt consolidators claim to be non-profit and while that may be so, they do require money to stay in operation. Some make a living from charging you ten percent of the payments you are consolidating, while others collect a percentage from the credit card companies with whom the negotiate on your behalf. Debt consolidators however, don’t do an awful lot that you couldn’t do yourself.
Essentially they do two things: they call your creditors and arrange a deal for them to accept a lower payment than you currently are making or a smaller balance than you actually owe. Then they collect your payment and write checks to the companies on your debt payment list. Creditors tend to favor dealing with debt consolidation companies because of the promise of a steady stream of payments they offer. Unfortunately, that steady stream could become a late stream if you run into a debt consolidator with shady practices. If they happen to miss payments your credit report score could at risk if you are reported to the credit bureaus for a late payment.
Do it yourself with equity
If you have the time and are willing to make a few disciplined moves, you can finesse your own debt consolidation. I have met a few people who are adept at playing the balance transfer game, deftly switching their debts from one zero balance credit card to the other just before the teaser offer on the credit card runs out. But not everyone has the time or willingness so to do. You will need to remember to send each credit card company a formal request to close your account as you could otherwise negatively affect your credit report score by leaving too many accounts open at the same time.
You can become your own debt consolidation expert using one of two approaches. Let’s assume you own a home and have substantial equity in it. Negotiating a home equity loan to pay off your debts could be a wise move as you will likely get one at a much lower rate than the rate on the debts with which you are now struggling. You can then decide to pocket the savings but a better idea would be to keep your payment level same as when you were paying multiple debts and pay off the home equity loan faster.
Refinancing your home to pay off credit card debts is also an option but you must resist the temptation to start using your credit cards again. Otherwise you will have effectively changed short-term debt to long-term debt and started on accumulating short-term debt again. I personally prefer to keep my mortgage separate from my unsecured debt but your preferences may vary.
Do it yourself without equity
If you do not own a home or if you have very little equity in your property, there are steps you can take to become your own personal debt consolidator. The first and simplest approach would be to get a personal loan from your credit union. Rates are likely to be much lower than the credit card rates you are currently paying and you will be able to tackle your debt without the use of collateral.
Pick up the phone and call your credit card companies and ask for a better interest rate. Quite often, account reps or supervisors are allowed a band in which they can reduce your debt rate but you wouldn’t know if you don’t ask. If your debt consists of charged off items, most holders of the debt will be inclined to offer you favorable terms consisting of lower payments or longer periods. If you have a windfall around tax time you are the debt consolidation king! Call and negotiate a settlement yourself. I have heard of 35% settlements but usually these are offered on large debt balances of $5,000 and above. And make sure you get these settlement offers in writing.
Another strategy is to pay the minimum payment on all your debts except one. Use the money you saved paying minimum payments to tackle your highest interest rate debt with the most money you can spare. Having seen off that debt, move to the next one with the same strategy, adding the payment you were making on debt number one to the minimum payment on debt number two. Rest assured, you will eventually dig your self out from under your debt mountain. When you are through, start paying yourself the money you used to pay out to the holder
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