Debt Consolidation Is Primarily Debt Management

Tuesday, April 19, 2011, 2:00 AM | 24 Comments

Whether you are carrying a swollen belly from debt or not, your mailbox is frequently filled with offers for credit cards, mortgage refinancing, and home equity loans. Many of these offers try to convince you of the benefits of moving existing balances to the new lenders.

While that may be tempting and sound appealing, especially if you are heavily in debt and especially if the new loan offers an attractive initial interest rate, it is important to read the fine print, ask questions and consider all the factors associated with debt consolidation.

Debt Consolidation Care

However, debt consolidation is basically debt management. It is by no means the elimination of debt.

Moving all your spread out debt among many lenders to a single lender will not reduce or eliminate the amount you owe. You wish it would but it does not.

You must ultimately pay off the loan and pay interest until the loan is repaid. The goal for debt consolidation should be to use debt wisely.

Consider the following steps in the process of debt consolidation:

  • Paying down your credit card debt

    Every card holder has maximum amount on their credit that experts agree not to over-borrow beyond the limit.

    Even if you have not borrowed the maximum on your card, paying down your balance should be one of your top priorities.

    We all know that to reduce and eventually eliminate credit card debt, at a minimum we should do the following:

    • Pay more than the minimum on your credit card balance. The reason is that interest rates charged on most credit cards are usually much higher than those found on other loans.

    • Make your credit card payment as soon as you get the bill. Doing so will help reduce the interest you are charged.

    • Minimize your credit card usage for a period, some say a year if not more. You should not keep adding to the balance every month. The effect of interest on the reducing balance will be continually lower month to month. Using cash or a check may help you identify ways to spend less.

  • home equity line of credit

    Check to see what interest are you paying on your existing debt. Credit cards and unsecured personal loans usually have higher interest rates than other forms of secured debt like a mortgage, home equity loan or an auto loan.

    If you find that you can get lower interest rate on a home equity line of credit than the rates on unsecured loans, then by all means get a line of credit and pay your bills that way. It will save you money.

    If you have a great deal of high interest rate unsecured debt, then refinancing into a new fixed rate mortgage may result in lower overall interest costs.

    The interest you pay on your mortgage or home equity loan is also tax deductible if you itemize your deductions.

  • Keep the following in mind:

    • Your banker will be able to explain the alternatives and help come up with a solution that is right for you.

    • Consult with a financial adviser if home-equity loan sounds complicated.

    • Remember borrowing money means you have to repay it. If your borrowing is too high, take immediate steps to reduce it.

    • Every dollar of debt reduction will translate into less interest you pay.

In a Nutshell
There are many organizations that help consumers when all else fails. The Federal Trade Commission offers facts for consumers to consider when choosing a credit counselor.

Among the most important are to be very wary of any organization that wants you to pay an upfront fee for their services or that promises an easy solution to your situation.

If their message sounds too good to be true, it probably is. In that case, stay away from them.

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