How Does Debt Consolidation Work

Q: I started a business and incurred some debt on credit card. The interest rate is very high (about 25+ %). I recently closed the business and get back to employment (engineer) and have a good pay. Now I want to plan on paying the debts. I have seen ads on debt consolidation (and they say it is not debt consolidation load). Has anyone had any experience with those companies? Some advertise that they could reduce the interest rate to 5-10%. Is that true? What is the catch? Should I shop around for different companies? Can I negotiate directly to the credit card company (bank) for interest reduction? Thanks in advance for any advice / suggestion!

A: First of all, I am proud of you that you are going to pay off your debts. Its the best thing for both you and your creditors. So sorry the business didn't work out. Many of the "debt consolidation " plans are scams. (I have even seen Chapter 13 bankruptcy advertised as "debt consolidation", so be careful). If any of these people ask for ANY money or your checking account number, a general rule would be to RUN the other way. If you owe a large amount of credit card debt, which credit card company in their right mind would offer you an unsecured loan at 5-10% when secured loans to sound business are often going for more than 10%. To paraphrase some famous economists: "There aint no such thing as a free lunch" On the other hand, you can often find credit cards with lower rates, and many will have "teaser rates" that will be low for a few months. The teasers often turn into pumpkins after a few months. Reading the fine print is difficult. You may be able to use any offers you see with lower rates as leverage to call up your credit card company and get them to match it. They will often do this. Some people like to take out second mortgages to consolidate. The only problem with this, is if you mess up, you lose the house!!! I have seen people re-hock the car and use the proceeds to pay down credit cards. This is not great, but not as bad. If you haven't done this already, stop using the cards. (Cutting them up is a nice touch). Second thing to do is pay off the highest interest cards first. You may want to look up "Consumer Credit Counseling" in the white pages. They are a non profit organization that can give you very good advice in this situation. And its FREE. The are typically funded by United Way. They can often intercede with lenders on your behalf. .

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