Managing Debt

The phrase “debt consolidation” is something that most people love to hear when they are deep in debt and don’t know how to get out of it. There are many people who will work with you to get that debt down, but not everyone can be trusted. As with everything that you do in life you need to compare and investigate. And as with everything in life there are do’s and dont’s.

One of the first things that you need to remember when trying to consolidate your debt is that it is not always easy to receive a debt consolidation loan. If you really need a loan, it’s probably because you’ve already missed a few payments and your credit history has many problems with it.

If you are a credit risk, the consolidator may entice you with promises of an easy-does-it loan, and end up charging you higher interest rates than you’re paying now, as high as 21% or 22%. Your monthly payment may be lower with one of these loans, but you’ll end up paying more in the end.

Never go with the debt consolidators who promise to take care of everything this is called the fairy godmother fantasy. This Nice Big Debt Consolidation company comes along and swears they’ll make your life much easier. They’ll negotiate lower interest rates, reduce your monthly payments, and all you have to do is make one easy payment. The truth is, many debt consolidators build in a fee as part of the monthly payment you make to them.

It’s usually about 10% of the payment (i.e. about $40 on a $400 monthly payment). They pass along your payments to the creditor, some debit directly from your checking account, and get back a 10% to 15% slice that the relieved creditor is only too happy to rebate to the consolidator. Another risk with consolidators that everyone should know about: is that they have been known, in some cases, to make late payments or even miss payments, thus worsening your plight (and your credit record). Why risk so much with someone who may not even be reliable?

The last thing you need to stay away from is the balance transfer trap. Low-interest balance-transfer cards are a dime a dozen these days, but remember that those rates only last a few months, and then you have to switch cards again. The danger is that at some point all this activity begins to show up on your credit report, and you start to look like a bad risk. Then if you get turned down, you could be left holding the high-interest card you were hoping to dump.

If you think you can swing from the balance-transfer vines for a few months, just make sure you formally close all your accounts yourself, and then notify the credit-card company to mark the account closed at customer’s request. Otherwise, on your credit report, it will look like the creditor closed your account. Thus making you look like an even worse risk, even when you’re doing your best not to be.