Debt Consolidation can it work for you?

Ever get offers in the mail that promise to cut your debts dramatically and make you debt-free in only 48 months? I get them weekly and I am fascinated by the magnitude of the offers. Debt consolidation offers usually come in three different disguises all with variations on the theme. Let’s look at how you can use either of these three debt consolidation methods to your own advantage and let’s examine some of the shortcomings of each.

Credit card offers

You should know that credit card deals that offer balance transfers usually come with a few strings attached. Most cards require you to make all your transfers at the time you take up the offer. Another drawback is that most offers are made “up to” $5,000 or $10,000. You never know what you are getting until after the credit card company has run your credit, so don’t be surprised if you are unable to consolidate all your outstanding debt in one go. You must make sure to pay on time as credit card issuers will raise your rate on a zero percent card to the default rate if you miss a payment date.

High interest rate loans

Debt consolidation offers are often made by finance companies who offer the prospect of lowering your monthly payments. For some people, the thought of writing one check instead of keeping track of four or five separate debts is very attractive. It saves them the burden of remembering separate payment dates and amounts and they get to keep a little extra money in their pocket. The drawback, of course, is that finance companies and their like may charge you as much as 21% or higher to consolidate your credit card debt into one payment.

Debt consolidators...some do some don’t

Most debt make a living from charging you ten percent of the payments you are consolidating, while others collect a percentage from the credit card companies with whom the negotiate on your behalf. Debt consolidators however, don’t do an awful lot that you couldn’t do yourself.

Creditors tend to favor dealing with debt consolidation companies because of the promise of a steady stream of payments they offer. Unfortunately, that steady stream could become a late stream if you run into a debt consolidator with shady practices. If they happen to miss payments your credit report score could at risk if you are reported to the credit bureaus for a late payment.

Do it yourself with equity

You can become your own debt consolidation expert using one of two approaches. Let’s assume you own a home and have substantial equity in it. Negotiating a home equity loan to pay off your debts could be a wise move as you will likely get one at a much lower rate than the rate on the debts with which you are now struggling. You can then decide to pocket the savings but a better idea would be to keep your payment level same as when you were paying multiple debts and pay off the home equity loan faster.

Refinancing your home to pay off credit card debts is also an option but you must resist the temptation to start using your credit cards again.

Do it yourself without equity

If you do not own a home or if you have very little equity in your property, there are steps you can take to become your own personal debt consolidator. The first and simplest approach would be to get a personal loan from your credit union. Rates are likely to be much lower than the credit card rates you are currently paying and you will be able to tackle your debt without the use of collateral.

Pick up the phone and call your credit card companies and ask for a better interest rate. If you have a windfall around tax time you are the debt consolidation king! Call and negotiate a settlement yourself. And make sure you get these settlement offers in writing.

Another strategy is to pay the minimum payment on all your debts except one. Use the money you saved paying minimum payments to tackle your highest interest rate debt with the most money you can spare. Having seen off that debt, move to the next one with the same strategy, adding the payment you were making on debt number one to the minimum payment on debt number two. Rest assured, you will eventually dig your self out from under your debt mountain.

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