Debt consolidation is a good first step in managing personal finance and getting out of debt. Remembering one monthly payment is easier than trying to manage multiple bills, and one sum is easier to budget for.
Credit Card Debt
The first step in debt consolidation is to take a look at credit cards. Unsecured debts such as credit cards tend to have the highest interest rates, and are therefore the most expensive to carry.
Lay out each credit card on a table, and underneath each one write the following information:
- APR
- Amount owed
- Credit limit
- Balance transfer rules
- Credit card check rules (if applicable)
The goal is to consolidate as much credit card debt onto the card with the lowest APR as possible, to reduce the amount of interest that accrues each month as the debt is payed off.
Credit Card Consolidation, APR, and Balance Transfer
Before transferring balances or writing credit card checks, call the bank that issued the credit card. Ask them to do the following:
- Lower the APR of the card
- Agree to transfer a balance and waive the transfer balance fee
- Attach the low APR to the transferred debt
Balance transfers and credit card checks often have fees associated with them and a higher interest rate than new purchases. Consumers must be aware of the fine print in their contracts that allows the bank to attach higher APRs to transferred debt.
If the person who answers the phone does not have the authority to meet the above requirements, politely ask to speak to someone with more authority. Be non-confrontational and let the bank employee know that they have done nothing wrong. In the end, the bank may not agree, but it won't hurt to ask and it may help.
Beware Short-Term Low Interest Credit Card Offers
Unless the consolidated credit card debt can be paid off within the time frame, it is better to avoid short-term low or 0% interest offers. After the introductory period, the interest rate is likely to be high. For unsecured debt that must be paid off over a long period of time, it is better to negotiate with the credit card company a long-term low interest rate.
Beware Credit Card Debt Relief Companies
Some companies promise to help consumers get out of debt faster. They claim they will negotiate with debtors to lower the amount of debt, and then combine consumer payments into one monthly sum. While these claims are true, working with these companies destroys a person's credit rating for ten years. The effect is similar to declaring bankruptcy, except that those who go bankrupt do not have to repay debts. Working with debt consolidation companies trashes a person's financial status and he still has to repay the debts.
Other Unsecured Debt
Some charge cards are merchant-specific, such as a JC Penney card or a Shell Oil card for gasoline. To consolidate these, call the merchant and find out if they will take a Visa or Mastercard number over the phone.
Second Mortgage
Depending upon the size of the debt and the amount of equity in a home, it may be advisable to take out a second mortgage to pay off other debts. The interest on the second mortgage will most likely be lower than any unsecured debt interest rate. The cash from the second mortgage can go to pay off credit cards, car loans, and student loans. Then all debts are consolidated into one monthly payment to the mortgage company.
Before taking such action, a person should speak with a financial adviser to ascertain whether it is reasonable to expect that he or she will be able to stay on top of the monthly mortgage payment.
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