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Credit Card Consolidation - What You Need to Know Before Consolidating Debt
Consolidate! It seems to be the new fad in the world of consumer debt?the magic bullet that will effectively rid your life of all problems with credit card debt.
The advertisers, credit counselors, and financial experts are all shouting out:
?Slash your interest rate!?
?Save thousands of dollars!?
?With one low, monthly payment you?ll have extra money!?
And you know what? Consolidation can be a great option for digging your way out of credit card debt. But what the advertisements don?t tell you is that it?s not a magic bullet. Consolidation is a re-payment plan that is successful only when you are determined to do what it takes to make it work. It will take planning, determination, and a little elbow grease. But you can do it! Here?s what you need to know.
Find the Underlying Cause
The first step in any debt re-payment plan is determining the underlying cause; otherwise, the problem will happen again and again. Typically the problem is not the credit card itself. They are a great tool of convenience and security. Many people use them in a financially responsible way everyday. So if the problem is not the credit card, what is?
Overspending Habits
Let?s go ahead and face it. Sometimes the problem comes with just the bad habit of spending too much money. Credit expert Gerri Detweiler, author of The Ultimate Credit Handbook and founder of DebtConsolidationRx.com, says the two largest areas people tend to overspend is in the area of food and transportation. She?s heard of people spending $160 a month at the office vending machine! So maybe it?s time to take a reality check. Spend a month tracking every single expense down to the penny to see where your money is going. Then take the time, and maybe even help from a credit counselor, to setup a budget and a plan to stick with it.
A Life Crisis
Emergencies happen to everyone. Unfortunately people we love die, life-long careers disappear, and, as we?ve all seen in the news lately with Hurricane Katrina, natural disasters create havoc. All too often we are unprepared for such events and we end up putting a lot of expenses on credit cards. As you analyze your budget, it?s a good idea to determine a set amount to save each month for emergencies. Ideally, if your budget allows for it, a good amount is 5-10% of your take-home income. But if you can?t manage that much, then set aside as much as you can.
Big Life Events
Now I?m talking about events we expect?weddings, babies, college educations, family vacations, etc. Don?t let these events sneak up on you without some financial planning. The earlier you start, the better off you?ll be. And if for some reason the anticipated event doesn?t occur, at least you?ve built yourself a nice little nest egg.
Setting Aside Credit Cards for a Time
When you start consolidating debt it?s important not to accumulate any new debt. Trying to deal with a consolidation loan along with new consumer debt only builds layer upon layer of financial trouble. The accounts don?t have to necessarily be closed, but at least put the credit cards in an inconvenient location such as in a cup of frozen water in the back of the freezer, a safe deposit box, or even six feet under in your backyard! Once the consolidation loan is paid off, you?ve brought your finances back under control, and you?ve learned new healthy financial habits, then go ahead and bring them out from hiding if you want.
Lower Payment vs. Lower Cost
A big mistake many people make when consolidating debt is looking at the payment amount alone. Sure you can lump all your payments together into one low monthly payment, but what is your interest rate, fees, and length of the loan? A $5,000 loan at 10% for 15 years with a monthly payment of only $53 will cost you $2,000 more than the same amount at 18% for 5 years with a monthly payment of $126.
Consolidation Options
Now let?s take a look at some of the options for consolidating. When it comes to consolidating your credit card debt you have several options at your disposal, each with its own set of pros and cons. Here?s a brief description of some popular options along with their relative pros and cons.
Low-Rate Credit Cards
If your credit rating is good enough to qualify for a low-rate credit card, possibly even a zero percent introductory rate, transferring all your higher rate credit card balances could be a good option. This option generally works best if you can pay the balance off within one year. Check out our Card Reports section to evaluate different low-rate credit card offers.
Pros
Cons
Home Equity Loan or Home Equity Line of Credit
Because you?re using your home as collateral for this type of debt, it?s imperative that you really understand your repayment plan and deal with the issues that got you into debt in the first place. Detweiler suggests this is not a good option in a hardship or crisis situation, including a job loss, since failure to pay back a home equity loan could result in the loss of your home.
Pros
Cons
Personal Loan
Because of the potential effects of high credit card debt on your credit rating it may be difficult to qualify for an unsecured personal loan with a decent interest rate. If your credit rating is good you may qualify for a rate in the low-teens, but if it?s poor you may end up paying around 20 percent. Shop around at a variety of financial institutions including credit unions to compare the cost of fees and interest. And be aware that generally the extra products they try to sell aren?t worth the cost you?ll pay.
Pros
Cons
Now you?ve got some tools under your belt to help dig your way out of credit card debt. You can also browse our http://www.freeroller.net Articles Section for more information about credit cards and debt. Good luck in your quest to be debt free.
Finance Options for Debt Consolidation
Do you feel you are surrounded by debts on all sides and declaring bankruptcy is your only way out? Well, think again! There are several types of financing available that can help you get out of your financial crunch.
You can choose either of the following:
? Credit Counselling
? Debt Negotiation
? Secured Debt Consolidation Loans
? Unsecured Debt Consolidation Loans
Credit Counselling:
If you can?t figure out how to consolidate your debts, then you may consider the option of consulting a credit counsellor. A credit counsellor can give you an unbiased opinion of about your financial position. He can help you chalk out a debt management plan and also give you financial goals to achieve.
Debt Consolidation programs:
In this programs you approach a third-party agency, which in turn negotiates, with your creditors for a small fee. You pay this agency a certain amount every month. The agency then settles all your debts from this amount.
Secured Debt Consolidation Loans:
As the name suggests, a Secured Debt Consolidation Loan can be secured by pledging some form of collateral. A house is the most common form of collateral offered, although you can offer other assets like a commercial property, stocks etc. This loan can be procured on reasonable interest rates. The debt to equity ratio decided the amount that can be lent to you in the form of a secured debt consolidation loan.
Unsecured Debt Consolidation Loans:
As opposed to secured loans, Unsecured Debt Consolidation Loans do not necessitate collateral. In other words, no physical assets except the borrower?s word back an unsecured debt consolidation loan. The absence of security is the major reason behind lenders levying high interest rates on unsecured debt consolidation loans.This Loan operates in two ways:
? Lowers the interest rate as compared to what you are currently paying.? Or lowers your monthly payments by extending your repayment period. But in this scenario you end up paying more in interest charges.
Get rid of those credit card bills:
Credit cards generally carry a very high rate of interest. To top it all, if you miss a payment on your credit cards, you can end up with an impossibly large debt with you. Now you can exchange all those outstanding bills with a single low interest loan.
Approach a lender:
Nowadays, availing an unsecured debt consolidation loan is not an arduous task. You no longer have to visit the lenders personally to negotiate a deal with them. You can easily receive free quotes by applying online. Doing so also gives you a chance to compare different offers and then select the one that most befits your circumstances. Before lending a loan, the lenders conduct a thorough background check giving due stress to your credit record.
Start paying off:
Once you get your loan sanctioned, start paying off your pending loans. Start with the one that imposes the highest interest rate and then take it from there. You now will have to worry about paying just one loan rather than several loans at the same time.
Although, credit cards are also considered a finance option for debt consolidation, yet due to the high interest that they incur they are not advised. However, unsecured debt consolidation loans are most popular because they do not tie your assets to any sort of obligations.
Debt Consolidation: A Rising Industry
According to the Bank of England, the amount of money owed by consumers in the UK has edged closer to the symbolic ?1 trillion mark. As long as figures such as these keep getting reported, the debt consolidation industry will keep flourishing.
Consolidation Loans as a loan category originated as more and more people found themselves thrust into the debt maze. People who have too many outstanding debts to be paid draw out a debt consolidation loan.
Now let us explore how people end up in situations, which prompt them to take out a loan. Mortgage is one of the most common debts that UK residents incur. Next in line are credit cards. Na?ve consumers often fall prey to lucrative advertising done by the credit card companies. The result is often detrimental to their own welfare as they end up using several credit cards at the same time. Add to this, other loans like home improvement loans, car loans etc. and you are all set to face a financial crunch.
But what is consoling is that now more and more UK borrowers are seeking help for their debt problems. The most effective means of bidding farewell to your debt worries is by availing a consolidation loan.
A Debt Consolidation Loan does the following:
? Collates all your debts into a single payment.
? So now you don?t have to worry about paying multiple payments in the same month.
? Also, the interest rate on this combined loan comes out to be a lot lesser than what you would otherwise have to pay on your separate loans.
? You now have to deal with only when creditor instead of many.
The next question that pops up is who lends these loans. This loans are like personal loans that are available with the usual banks and other lending institutions. This Loans are becoming increasingly accessible with the presence of websites. Online services have actually known to bypass high street banks when it comes to lending debt consolidation loans.
This is how these online debt consolidation loan companies work:
? You are required to submit your details online using an enquiry form.
? Your details are then forwarded by the website to their network of lenders.
? You then receive their best offers.
? You can then select the one that most suits you.
Once your debt consolidation loan is sanctioned, your lender deals with your debt problems by either paying off the creditor through one and final payment or by requesting the creditor to freeze or lower the rate of interest. So now you have to worry about paying only a single monthly instalment instead of many.
No matter how messy your debt situation is there is always help at hand. But the first step needs to be taken from your side. You need to admit that you have a debt problem and then find means to get rid of them.
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