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› › Credit Card Consolidation - What You Need to Know Before Consolidating Debt
Credit Card Consolidation - What You Need to Know
Before Consolidating Debt
Consolidate! It seems to be the new fad in the world of consumer debt?
The magic bullet that will effectively rid your life of all problems
with credit card debt.
The advertisers, credit counselors, and financial experts are all
shouting out:
- Slash your interest rate!
- Save thousands of dollars!
- With one low, monthly payment you'll have extra money!
And you know what? Consolidation can be a great option for digging your
way out of credit card debt. But what the advertisements don't tell you
is that it's not a magic bullet. Consolidation is a re-payment plan that
is successful only when you are determined to do what it takes to make
it work. It will take planning, determination, and a little elbow
grease. But you can do it! Here?s what you need to know.
Find the Underlying Cause
The first step in any debt re-payment plan is determining the underlying
cause; otherwise, the problem will happen again and again. Typically the
problem is not the credit card itself. They are a great tool of
convenience and security. Many people use them in a financially
responsible way everyday. So if the problem is not the credit card, what
is?
Overspending Habits
Let's go ahead and face it. Sometimes the problem comes with just the
bad habit of spending too much money. Credit expert Gerri Detweiler,
author of The Ultimate Credit Handbook and founder of
DebtConsolidationRx.com, says the two largest areas people tend to
overspend is in the area of food and transportation. She's heard of
people spending $160 a month at the office vending machine! So maybe
it's time to take a reality check. Spend a month tracking every single
expense down to the penny to see where your money is going. Then take
the time, and maybe even help from a credit counsellor, to setup a
budget and a plan to stick with it.
A Life Crisis
Emergencies happen to everyone. Unfortunately people we love die,
life-long careers disappear, and, as we've all seen in the news lately
with Hurricane Katrina, natural disasters create havoc. All too often we
are unprepared for such events and we end up putting a lot of expenses
on credit cards. As you analyze your budget, it's a good idea to
determine a set amount to save each month for emergencies. Ideally, if
your budget allows for it, a good amount is 5-10% of your take-home
income. But if you can't manage that much, then set aside as much as you
can.
Big Life Events
Now I'm talking about events we expect: weddings, babies, college
educations, family vacations, etc. Don't let these events sneak up on
you without some financial planning. The earlier you start, the better
off you'll be. And if for some reason the anticipated event doesn't
occur, at least you've built yourself a nice little nest egg.
Setting Aside Credit Cards for a Time
When you start consolidating debt it's important not to accumulate any
new debt. Trying to deal with a consolidation loan along with new
consumer debt only builds layer upon layer of financial trouble. The
accounts don't have to necessarily be closed, but at least put the
credit cards in an inconvenient location such as in a cup of frozen
water in the back of the freezer, a safe deposit box, or even six feet
under in your backyard! Once the consolidation loan is paid off, you've
brought your finances back under control, and you've learned new healthy
financial habits, then go ahead and bring them out from hiding if you
want.
Lower Payment vs. Lower Cost
A big mistake many people make when consolidating debt is looking at the
payment amount alone. Sure you can lump all your payments together into
one low monthly payment, but what is your interest rate, fees, and
length of the loan? A $5,000 loan at 10% for 15 years with a monthly
payment of only $53 will cost you $2,000 more than the same amount at
18% for 5 years with a monthly payment of $126.
(Read Part 2)
By Amy L. Cooper-Arnold,
CardRatings.com
Staff Writer
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