Help With Debt And Credit Card Consolidation
Q: I'm seeking help on managing my credit card debt. Currently, I owe about 12,000 on 8 credit cards and paying interest rates between 18-29%. I'm thinking about consolidating this amount to a lower interest rate. About a week ago, I received a phone call from a consolidation company soliciting their business. They qouted me a 6-10% interest rate on each of my credit card and a payment of 360.00 a month. They also told me that I would be charged 40.00 each month which would already be included in the 360.00 payment amount. I didn't apply at the time because I've heard that alot of these companies are scams and that alot of people who signed up ended up with more problems and paying a lot more than their preconsolidation amount. I'm not sure what to do at this point as I don't know too much about consolidation and which companies are ligitimate. If anybody is familiar with consolidation and know of any legitimate companies, please help me out and respond to this post.
A: _$12,000 isn't all that much, in the scheme of things - less debt than you'd take on, most likely, if you bought a new car. But those interest rates are a killer. You don't give us much to go on, but you're asking for advice, so here's what I'd suggest. The absolute first thing you have to do to get out of debt is to not incur any more debt. If you simply must use one or another of these cards, you absolutely must pay off all current charges when you get the bill. It's OK to use a card as a substitute for cash, but at the end of the month, you have to pay for everything you've charged. Now take the statements and lay them out. We can assume from what you've posted that you can afford to put $360/month toward getting out of debt (that $360 is not for paying off what you charged this month, it's in addition to paying off what you charged this month). You can go one of two ways. 1. Pay the minimums on all the cards except the one with the highest interest rate. Put the balance of the $360 against the card with the highest rate. When that card is paid off, cut it up and close the account. You don't need to be borrowing money at 28% anyway. Continue doing the same with the remaining accounts - pay the minimum on all but the highest rate card, pay off the highest rate card, and get rid of it. It could be that you owe the most on the highest rate card, and relatively little on one or two of the others. Proceeding as above might be discouraging because it will take a long time to pay off the highest rate card. So some people find it easier to use the second method. 2. Pay the minimums on all cards except the one with the lowest balance. Put the remainder of your $360 against the card with the lowest balance until it's paid off. Continue with the remaining cards. Method one will cost you the least amount in the long run unless it just so happens that you have lower balances on the higher rate cards. Method two might be psychologically easier. Using method one, you might keep the last one or two accounts - credit cards are useful, and even essential for some things (try renting a car without a credit card), if used with just a bit of prudence. Some people might object that not using a consolidation company like the one that solicited you over the phone means you'll end up paying more in interest. But they're charging you a $40 fee on the $320 payment (for the total of $360). That's equivalent to 12.5% interest. Assuming you have roughly equal balances on all your cards, you're paying "blended rate" of around 23%-24%. If they get your rate down to 10%, you'll be effectively paying 22%. In addition, as you pay off the higher rate cards, your blended rate will go down until you're on your last card, when you'll be paying 18%. If you use this company, you'll be paying that effective 22% all the way through. I don't know if the company is legitimate or not, but even if they're completely above board and can and will do everything they claim, in my opinion it's unlikely that they'll save you a dime. Whatever you do, realize that you're looking at several years to pay this stuff off. If your interest rate was zero, it would take almost 3 years to pay off $12,000 at $360/month. Your interest rate is a long way from zero, so if you can afford to put more towards your debt, do it - the quicker you pay it off, the less it'll cost. _Well My credit never took a hit because I always made minimum payments on time. Event though it strangled me and at times I wondered how I was going to pay for the weeks food, I still made payments on time so technically my credit never took a hit and the agencies never would have know by looking at my record I was drowning. Credit counseling will put a big hit on credit rating. credit consoulling is one step above bankruptcy almost. I never dealt with consolidation companies so I can't speak for them. Credit consoulling companies are supposed to be NON-PROFIT but when I phoned a few during my crisis my credit score was going to take a hit and show on my record for 7 years as two stages above bankruptcy. Instead I took the consolidation loan from my local bank. unlike credit counseling, I think consolidation loan companies are profit oriented. Some credit counseling agencies are supported but YMCA or United way etc but there is a price to use them and it's at the expense of your credit score. Avoid them if you can but if you are sinking sinking sinking them maybe they are a better choice than starving or bankruptcy. This was about 3 or 4 years ago. I only became debt free in Jan 2006 and already I have saved 11000 dollars in cash since then. I no longer live paycheck to paycheck whereas 1 year ago I did. because I was able to always make minimum payments I went to a bank for help instead because my income was high enough to work with and the bank does NOT want my credit rating to take a hit. the bank will pressure you to take credit cards or lines of credit after you pay the consolidation loan off. IGNORE THEM!!!. just keep the credit card you have had the longest for emergencies. that will do fine on your credit score. And also I had a car loan and student loans at same time that I kept separate for payment flexibility that way I could spread debt payments over the month instead of one lump sum. It was revolving debt that I consolidated. I simply asked my bank if they offered the loan and they said yes. I'm in Canada and there are 6 national banks and these guys are the second largest bank up here. They don't advertise this type of loan but it is available iof you ask a personal banker. Plus it's a name-brand bank and not a fly by night outfit. That is how I did it. It may not work for everyone but I have a feeling you are in the same shoes I was 3 or 4 years ago. there is light at the end of the tunnel. First step DEAL WITH THE CREDIT CARDS first, especially the highest interest one!! All extra money you can find put into the smallest owing or the highest interest card (one or the other). Make minimum payments on all your debts except that one credit card you picked. This one credit card you pick: throw all your energy into paying it off first. Once that is paid for pick the second card and do the same next year. It may seem hopeless now but trust me it works. Pay your car loan and student loans last. they will have the lowest interest and will are not revolving i.e. they do not charge interest on interest like credit cards. _My rule is that rarely if ever should you buy _anything_ from _anybody_ who contacts you. This will save you from most scams, telemarketing, e-mail or other, as well as a lot of other foolish decisions. When you want to buy something, you research various vendors. I'm a big believer in using the low intro rates to avoid/ reduce interest, as John Weiss suggested. Also, as he mentioned, NEVER use that card,