Basics of Debt Consolidation

Debt Consolidation is a big loan that will pay off your credit card loans. There are several ways these programs work. The most popular way is to take one lump sum amount of money from you (the borrower) and distribute it to your credit card companies (the lenders). All your loans will be consolidated into one payment usually withdrawn directly from your bank on a fixed date every month. These programs make the card holders life easier.

As a general rule, if you have many credit cards from different companies with high interest rates, then debt consolidation can help you manage your debt with only one bill and much lower APRs. These companies negotiate a lower interest rate for you and this can save a lot of money in the long run. This will work out in your favor if you have credit cards with APRs of around 30% because these programs can reduce these interest rates to between 12% – 18%. These programs require a monthly administration fees, which is usually around and this will come off your savings. Remember if the admin fee does not come off your savings, then it is not a good idea to sign up for a debt consolidation program.

So it looks like everything about the credit card debt consolidation is positive. Well, it is not always the case. There are a few advantages and also disadvantages of these programs. You have to find a balance between them. The fact is that these programs do help you in paying off your credit card loan. Here are some advantages and disadvantages of these programs.

Advantages

1. Decreased payment amounts: The monthly payments will be less than what you were paying before debt consolidation because you are paying off the loan over a longer duration.

2. Simpler to manage: After you signup for a program, you will have a relief from reading your credit card statements, deciding how much to pay for each credit card and then making the payments one by one. Usually, the company will withdraw the money directly from the bank and you will not have to be concerned about late payments.

3. Decreased interest rates: This is one of the major advantages for many credit card owners. Some of these companies bring down the interest rates much lower than the current ones. This can save lots of money for you.

4. Debt Management tips: Many of the good companies give lots of free tips on managing your debt. They draw out a plan on debt management. These tips are invaluable. They even mail out booklets on debt management.

Disadvantages

1. Lower FICO scores: Many experts debate that debt consolidation does not have any effect on credit (FICO) scores the fact is that this has a negative effect on the credit scores. Enrolling in such programs will always be reflected in your credit history. Most credit repair companies mention that it is difficult to increase your credit score if you are currently working with a debt consolidation program. Your credit scores can be raised after you have paid off the loans and are not currently enrolled in any of these programs. Even if you can remove one credit card from the program that can help you increase your credit scores.

2. Higher Payment: Since your payments are made over a longer duration of time i.e. in more number of the years, then you will end up paying more in the long run. One way to prevent this is – if your financial situation has improved, then you can pay off larger sum of money. Most of times there will be no penalty for paying off the debt sooner than the agreed number of months. Before enrolling in a credit card debt consolidation program, you can confirm if there is a penalty or not for paying off the debt sooner than the agreed number of months.

3. Credit cards inactivation: If a credit card payment is enrolled in such a program, then that particular card account will be inactivated. i.e., that credit card can no longer be used.

4. Negative Impact on Future Loans: Once you have enrolled in a credit card debt consolidation program, this will remain in your credit history. So, all future loan requests new credit card applications, home loan, car (automobile) loans etc. will involve references to your debt consolidation. i.e., the lender will have knowledge about your participation in debt consolidation program. Some people are very uncomfortable about this but it is up to you decide. Your credit history is a private record and will be provided by credit score companies only on a need-to-know basis. If you apply for home loan, then the chances of getting rejected is higher and if you get accepted, then mortgage broker will ask for explanation. Again all these conversations are kept confidential.

So, the question is – when should you consider a credit card debt consolidation? If you are paying high interest rates around 30% on a credit card, you have many credit cards, you are unable to make payments or your are barely able to make just the minimum monthly payments, you are finding it difficult to manage all the payments etc., you must consider signing up for a credit card debt consolidation program. After reading through the advantages and disadvantages mentioned earlier, make decision about signing up or not signing up for such a program.

How to find a good debt consolidation program / company?

Signing up with the right debt consolidation program is critical for saving money and successfully consolidating your debt. There are a good number of scams in this business so it is in your best interest to proceed cautiously to prevent being victim of a scam. Here are some very good sources of finding the right program.

1. References from friends and relatives: It is best to ask your trusted friends if they have any recommendations for reliable program i.e., if they have enrolled in one of these or know of anyone who enrolled in one and is satisfied. As mentioned before, there are many scams and so with this option, you can feel safe. This should be your first option.

2. Television advertisements: Most of big and established companies run advertisements on TV. These are companies that have a lot of experience and have been successful with debt consolidation. But it is a wise thing to research the company. Look for their website and check for their standing in Better Business Bureau (BBB) and must have been in existence for a few years. Also, search ripoffreport.com website for this company – this website where victims of scams post their experiences.

3. Mails: When you are unable to payoff debt on time, you will receive mails from some companies that will offer help with consolidating your credit card debt. These companies have permission to access some of your basic information. The good thing here is that your fit their profile of their clients and that is why you received a mail with their credit card debt consolidation services. As mentioned earlier, research these companies using the same methods described above.

4. Telemarketing phone calls: Typically, telemarketing phone calls that you get is because your debt situation is such that it fits the requirement of their clients. If you receive a phone call, remember to never enroll in the first phone call. Note down all the details of this company such as the websites, contact person and phone number to call. Research the company extensively as mentioned above.

5. Online Research: Research the internet for good credit card debt consolidation companies both non-profit and profit companies. Once you create a list of possible companies, research the companies extensively. Talk to these companies until you are comfortable about enrolling with them.

For a few months or years, if you can handle the disadvantages of these programs, then enroll in a program. Credit card debt consolidation can get you out of your current debt problems and save you a lot of money by lowering your interest rates but if you do not spend judiciously, then you will be back into the same debt problems and this cycle will never end. So the long term solution to debt problems is to change your spending habits and live slightly below your means. Remember you need to manage the money / debt and NOT let the money / debt manage you.

The author Lokesh Kumar is a business owner, investor and has very good financial knowledge. Visit Best Credit Cards and Debt Consolidation website and blog for quality information about credit cards, debt consolidation, credit (FICO) scores and honest reviews of 500+ credit cards.

With very few options, consumers often end up with a choice between a balance transfer or a debt consolidation loan as their options to get help with credit debt. Admittedly, the utility of one option over the other will depend mostly on of unsecured personal loans, and the options available to that consumer to consolidate credit card debt.

Interest Free Credit Cards: A Short Term Option For Help With Debt

While not a long term solution for consolidating debt, a 0 APR balance transfer is an interest free way to consolidate credit card debt for about six to twelve months. If the consumer wanted to extend the consolidation for a longer period of time, he or she would search out other 0 interest credit cards near the end of the initial term and transfer the balance before the interest free credit cards offer expired.

However, there are three major disadvantages of using short term interest free credit card balance transfers to consolidate credit debt.

The balance transfer usually carries a 3-4% balance transfer fee. If the consumer is lucky the balance transfer fee would be capped at $50 to $75 dollars. However, in recent months, some issuers have been removing the caps on balance transfer fees.

Good credit scores are essential to access 0 APR balance transfers. If the consumer has missed a payment or made a late payment on any other bill, that fact will be registered with credit agencies. Issuers are unlikely to approve the application (especially one with a 0 APR balance transfer offer).

It is a gamble. when using interest free credit cards for consolidating debt, the consumer is “betting on the come” (to borrow a term from the game of craps). The consumer is betting that he or she will either be able to pay off the credit debt before the end of the time period or transfer the remaining balance to another interest free credit card.

That is a steep gamble, especially in our current economic climate.

As such, the interest free credit card should be reserved for those that can pay off the balance within six to twelve months.

Unsecured Debt Consolidation Loans: A Long Term Solution To Credit Debt

A long term alternative to the interest free credit cards balance transfer game is to consolidate debt with a low interest debt consolidation loan.

Unlike the juggling involved in the balance transfer, the unsecured debt consolidation loan takes the complication out of credit card debt relief. A debt consolidation reduces many credit card debt obligations to one single monthly repayment. The consumer does get the advantages of: (1) a single low monthly payment, (2) the security of knowing all other debts are paid, and (3) the peace of knowing that when the final payment is made, the consumer will enjoy complete debt relief.

What About Secured Credit Card Debt Consolidation Loans?

In most states, the consumer can open a home equity line of credit (HELOC) and use the equity in their residence to consolidate credit debt. However, in our current economic climate, home values have plummeted and there may be no equity upon which to draw.

Secondly, it is not a good idea to turn an unsecured debt into one secured by your personal residence. Credit debt is legally an unsecured personal debt. In other words, in most cases, the creditor cannot take your home in response to defaulting on a credit card.

When a consumer takes out a debt consolidation loan using a HELOC, they are turning unsecured debt into debt secured by his home.

This is rarely a good way to simplify family finances.

As such, when an unsecured consolidation loan not be available, a balance transfer is preferable even if it is a short term interest free credit card or low interest balance transfer option.

Do You Need A Short Term Or Long Term Debt Consolidation Solution?

If you have a small amount of unsecured personal debt that you could generally pay off in six to twelve months, then an interest free credit card is a good option for you. Be prepared for a balance transfer fee and be able to produce a good credit score. For those in need of longer term solutions help with debt and/or have bad credit, then an unsecured debt consolidation loan is the preferable choice.

Accessing a HELOC is not a wise solution for credit card debt relief.

Rick Bertrandt is an attorney and debt consolidation counselor. Mr. Bertrandt counsels his clients to consolidate credit card debt using the tools found at 0 Credit Cards Guide.com

- Stop charging: if you want to get out of credit card, you cannot continue charging more on those cards. Ask yourself why you are in debt in the first place. As stated before, we usually get in debt because we cannot control our emotions.

We use money to fix problems that money cannot fix. And we unfortunately use money that we do not have to fix problems that we could use some rationality to fix.

- Try to get a lower APR on your credit card: one strategy that credit card use to keep you in debt for a long time is to manipulate the interest rate that they charge you. The higher your interest rate, the longer it will take you to pay down your balance. Call your credit card and ask for a lower APR. If you cannot get that from the first person that you talk to, try talking to a manager. Appeal to their emotions. If you try long and hard enough, you will be able to get a lower APR.

-Transfer balance from high-APR cards to low-APR cards: this is the way you can control yourself the APR you pay on some of the balance you owe on your credit cards.

Hopefully, the above mentioned strategies can help you pay off your credit cards quicker