Problems With Consolidation Credit Debt Needing Help
Q: Well I have a quick question maybe someone can help me with. My girlfriend has about 6 different credit card bills that she racked up when she was younger. She is now at the point where she would like to possibly consolidate all the debt and pay a low monthly few. She called a debt consolidation company and they said this does not effect her credit. I heard from a good friend that debt consolidation of credit cards will ruin her credit for 7 years?? Is this true.Also if this is the good thing to do can anyone suggest a reliable debt consolidation company I can set her up with. Also if this isn't the best thing to do for her what is?
A: _What to do depends a lot on the interest rates and the balances, and how much money she has for debt retirement each month. She probably gets 20 or 30 preapproved credit card applications in her mailbox each month. Find the one with the most generous balance transfer terms (0% or 1% interest for the first 18 months, little or no transfer fee, etc.) and transfer the big high-rate balances onto the new card. Do not actually use that new card for purchases until the transfer balance is paid off, and make sure she pays at least a week early every month. (if she's ever a day late with a payment, the rate may jump to near 30%. If she pays just barely on time, they may hold the payment until it's a day late). Make small payments on the accounts with low interest rates (unless the balance is low and can be paid off quickly) and make big payments on the accounts with high rates. When the introductory rate is about to expire, hopefully it'll be almost paid off, but if not she can apply for a new introductory card and play the same game again. Cut up the cards as they are paid off or transferred, and close some of the accounts. That's my system anyway. _It depends. If she uses a service to consolidate and make a payment plan, that is like dropping a nuke on your credit file. It is just like a bankruptcy. If you use a home equity loan, then your credit file is likely to improve since secure debt looks a little better than credit card debt. The problem with doing a consolidation is that it often frees up the credit cards so she can rack up a whole new set of bills. Then she is in even worse condition back in the same spot of massive credit card debt, plus the consolidation payments, and now being out of options. The question boils down to her behavior. Has she stopped spending? If so, then a consolidation might work for her. If she has not broken the spending habbit, then a consolidation will backfire and make things worse. Even worse is the idea of a home equity loan to solve credit card debt. What this does is (a) put your house a risk to pay for trinkets, (b) converts a pizza bill into a 30 year payment plan, and (c) converts unsecure debt into secure debt. Those are all bad ideas. I would consider the H/E loan if you still have lots of equity left, and you get a much better interest rate. I'd avoid the consolidation companies--they are blood suckers out to to drain you of anything you have left. Perhaps the best thing to do is tough it out one card at a time, and learn this lesson painfully well so it doesn't happen again. _Tell her you can't date a woman who doesn't want to learn how to manage her money. Lack of money management skills has ruined many a relationship and contributed to many a divorce. Tell her, with a hug, you do a disservice to her by doing her homework. If she really wants help, make her come here by her lonesome and ask the questions. You can literally hold her hand, while she's fighting through this learning process, but no more. Like another poster said, if the spending habits that got her into this morass aren't cured, then simply consolidating will do nothing. Get that gal putting her monthly income on one spreadsheet and outcome on another. There should be a several lines of the outcome spreadsheet dedicated to paying off each doggone credit card bill. Let her discover the joy of becoming debt-free and accumulating wealth. Bloody addictive and good for the relationship. How many people don't plan financially and lose control of their lives is amazing. Put her back in control and, ya know, maybe discover newfound respect for each other. Hang in there. You two could either come out much richer (on at least two levels) for this, or the relationship probably should end, lest you both dig yourselves further into the proverbial black hole of debt. _I would like to these additional points: 1. Using your equity in your home allows you to convert non-deductible consumer debt to tax deductible mortgage interest. Under current tax laws, you are allowed to convert 100K of consumer debt to tax deductible interest. See IRS Pub 936 for further details. 2. Consider the use of a 2nd mortgage instead of a HELOC (home equity line of credit); HELOC's a pegged to the Prime Rate, in other words when Greenspan speaks, your payments go up. A 2nd mortgage can be interest only (like a HELOC) or fixed interest rate, but it is fixed for the life of the loan and not prone to increases like a HELOC. 3. Stay far away from any of these debt consolidation companies, they do more harm then good as the other writers have indicated. (Even those that claim to be non-profit) 4. Ideas to raise your girlfriend's credit: a. Have her pay her balances down to 30% of the available credit. (i.e. she has 5K on a credit card with a 10K allowable credit; pay down to 3K) b. Have her call all of her active credit card cos. and have them raise the available credit (This will change the debt ratio and will get her closer to 30% of available credit without the need to make additional payments) c. Have her apply for additional credit cards but don't use them. d. Transfer current outstanding balances to a 0% interest credit card offer. e. Do not close the accounts as this will have a negative effect on her credit as she will be erasing the credit history she has established with those credit card companies. One other possibility is to use your 401K/Retirement plan; you will be borrowing money from yourself and the interest you pay on the loan will be paid back to you. (This works if you don't have the equity in your home) Please be advised that my advice is for those that are disciplined and not for those that are going to recreate the very problem you are looking to rectify. As the other writer has already elluded to, the problem is not the debt (money, budget and a discplined attitude can clean this up) it is her high consumption lifesytle or behavior. _Step 1. Cut cards, close all accounts. Step 2. Get a debit card. There isn't anything I can think of that you can't with a debit card that you need a credit card. Step 3. Forget CCCS etc. Step 4. Get a credit report,