| Consolidate! It seems to be the new fad in the | | | | payment, but what is your interest rate, fees, |
| world of consumer debt--the magic bullet that will | | | | and length of the loan? A $5,000 loan at 10% for |
| effectively rid your life of all problems with credit | | | | 15 years with a monthly payment of only $53 will |
| card debt. | | | | cost you $2,000 more than the same amount at |
| The advertisers, credit counselors, and financial | | | | 18% for 5 years with a monthly payment of |
| experts are all shouting out: | | | | $126. |
| "Slash your interest rate!" | | | | Consolidation Options |
| "Save thousands of dollars!" | | | | Now let's take a look at some of the options for |
| "With one low, monthly payment you'll have extra | | | | consolidating. When it comes to consolidating your |
| money!" | | | | credit card debt you have several options at your |
| And you know what? Consolidation can be a | | | | disposal, each with its own set of pros and cons. |
| great option for digging your way out of credit | | | | Here's a brief description of some popular options |
| card debt. But what the advertisements don't tell | | | | along with their relative pros and cons. |
| you is that it's not a magic bullet. Consolidation is a | | | | Low-Rate Credit Cards |
| re-payment plan that is successful only when you | | | | If your credit rating is good enough to qualify for |
| are determined to do what it takes to make it | | | | a low-rate credit card, possibly even a zero |
| work. It will take planning, determination, and a | | | | percent introductory rate, transferring all your |
| little elbow grease. But you can do it! Here's what | | | | higher rate credit card balances could be a good |
| you need to know. | | | | option. This option generally works best if you can |
| Find the Underlying Cause | | | | pay the balance off within one year. Check out |
| The first step in any debt re-payment plan is | | | | our Card Reports section to evaluate different |
| determining the underlying cause; otherwise, the | | | | low-rate credit card offers. |
| problem will happen again and again. Typically the | | | | Pros |
| problem is not the credit card itself. They are a | | | | - If you qualify for a low-introductory rate card |
| great tool of convenience and security. Many | | | | you may get the benefit of not paying any |
| people use them in a financially responsible way | | | | interest for a time. |
| everyday. So if the problem is not the credit | | | | Cons |
| card, what is? | | | | - Excessive transfer and new account activity on |
| Overspending Habits | | | | your credit history could cause you to have a |
| Let's go ahead and face it. Sometimes the | | | | poor credit score. This is bad when your low-rate |
| problem comes with just the bad habit of | | | | credit card expires and you aren't able to qualify |
| spending too much money. Credit expert Gerri | | | | for a new card. You could be stuck with a high |
| Detweiler, author of The Ultimate Credit | | | | interest rate. |
| Handbook and founder of | | | | - Watch out for balance transfer fees. Fees could |
| DebtConsolidationRx.com, says the two largest | | | | potentially outweigh any interest savings that you |
| areas people tend to overspend is in the area of | | | | might realize. |
| food and transportation. She's heard of people | | | | Home Equity Loan or Home Equity Line of Credit |
| spending $160 a month at the office vending | | | | Because you're using your home as collateral for |
| machine! So maybe it's time to take a reality | | | | this type of debt, it's imperative that you really |
| check. Spend a month tracking every single | | | | understand your repayment plan and deal with |
| expense down to the penny to see where your | | | | the issues that got you into debt in the first place. |
| money is going. Then take the time, and maybe | | | | Detweiler suggests this is not a good option in a |
| even help from a credit counselor, to setup a | | | | hardship or crisis situation, including a job loss, |
| budget and a plan to stick with it. | | | | since failure to pay back a home equity loan could |
| A Life Crisis | | | | result in the loss of your home. |
| Emergencies happen to everyone. Unfortunately | | | | Pros |
| people we love die, life-long careers disappear, | | | | - Usually a lower interest rate. |
| and, as we've all seen in the news lately with | | | | - Interest is normally tax deductible. |
| Hurricane Katrina, natural disasters create havoc. | | | | - Your monthly payment will usually be lower so |
| All too often we are unprepared for such events | | | | you can use the difference between it and your |
| and we end up putting a lot of expenses on credit | | | | fixed monthly debt payment to start building an |
| cards. As you analyze your budget, it's a good | | | | emergency fund. |
| idea to determine a set amount to save each | | | | Cons |
| month for emergencies. Ideally, if your budget | | | | - You will be trading unsecured debt for secured |
| allows for it, a good amount is 5-10% of your | | | | debt putting your home at risk. If you miss even |
| take-home income. But if you can't manage that | | | | one payment you could lose your home, whereas |
| much, then set aside as much as you can. | | | | if you left it as credit card debt you would still |
| Big Life Events | | | | have a place to live. |
| Now I'm talking about events we | | | | - You could end up paying a lot of money in fees |
| expect--weddings, babies, college educations, | | | | such as closing costs and appraisal fees. Make |
| family vacations, etc. Don't let these events | | | | sure you shop around to find the best deal. |
| sneak up on you without some financial planning. | | | | - The entire loan must be repaid before you can |
| The earlier you start, the better off you'll be. And | | | | sell your house. |
| if for some reason the anticipated event doesn't | | | | Personal Loan |
| occur, at least you've built yourself a nice little | | | | Because of the potential effects of high credit |
| nest egg. | | | | card debt on your credit rating it may be difficult |
| Setting Aside Credit Cards for a Time | | | | to qualify for an unsecured personal loan with a |
| When you start consolidating debt it's important | | | | decent interest rate. If your credit rating is good |
| not to accumulate any new debt. Trying to deal | | | | you may qualify for a rate in the low-teens, but if |
| with a consolidation loan along with new consumer | | | | it's poor you may end up paying around 20 |
| debt only builds layer upon layer of financial | | | | percent. Shop around at a variety of financial |
| trouble. The accounts don't have to necessarily be | | | | institutions including credit unions to compare the |
| closed, but at least put the credit cards in an | | | | cost of fees and interest. And be aware that |
| inconvenient location such as in a cup of frozen | | | | generally the extra products they try to sell aren't |
| water in the back of the freezer, a safe deposit | | | | worth the cost you'll pay. |
| box, or even six feet under in your backyard! | | | | Pros |
| Once the consolidation loan is paid off, you've | | | | - Can get good rates, especially if you are a |
| brought your finances back under control, and | | | | member of a credit union and have good credit. |
| you've learned new healthy financial habits, then | | | | - Unsecured so you don't have to worry about |
| go ahead and bring them out from hiding if you | | | | losing your home. |
| want. | | | | Cons |
| Lower Payment vs. Lower Cost | | | | - Your credit rating could drop further because of |
| A big mistake many people make when | | | | credit inquiries, closing old accounts, and opening |
| consolidating debt is looking at the payment | | | | new accounts. |
| amount alone. Sure you can lump all your | | | | - Additional fees. |
| payments together into one low monthly | | | | |