| Find out how to consolidate
debt and get free credit counseling from a debt consolidation company
When you ask a debt consolidation company to consolidate debt for
you, they may do several things. One way to consolidate debt is
to get all of your payments into one more easy-to-manage payment.
A debt consolidation company can also offer free credit counseling
services so that they can coach you on how to consolidate debt and
bills. Another definition that sometimes falls under "consolidate
debt" is when a credit counseling team from a debt consolidation
company negotiates to get you lower interest rates. Lowering your
interest rates alone can help you save thousands of dollars.
To consolidate debt all you have to do is have an account of all
of your bills. Make sure you are keeping track of everything. A
credit counseling service can help you put it all in order. Once
you get in touch with a debt consolidation company it is easy to
consolidate debt. They will walk you step-by-step until you are
comfortable. Get free
debt consolidation help and find out how easy it really is to
consolidate debt.
Consolidate Debt
Transferring credit balances to the wrong lower interest loan is
tantamount to accepting a life preserver from a shark. Similarly,
choosing the wrong debt consolidation loan savagely threatens the
point of consolidating at all, if you decide to consolidate debt.
So, how do you know when balance transfers and debt consolidation
loans are right for you? Done right, debt consolidation can save
you a fortune, but done wrong, it'll dig you deeper into debt."
The message throughout is the fact that you must look beyond the
interest rate and any other variables except total cost. The fact
that a payment may be lower does not mean you are saving money.
Learn the right way to consolidate debt.
For example, the minimum monthly payment on a credit card is typically
2%-3%. In most instances the less you pay per month, the more you
pay overall. See what happens with varying minimum payments based
upon a $5000 balance and a 17% interest rate.
| Card |
Min. % Pay |
Mthly Pay |
Total Interest |
Years to Payoff |
| A |
1.67%
|
$83.50
|
$25,354
|
81 |
| B |
2.0 |
100.00 |
11,304 |
40 |
| C |
2.5 |
125.00 |
6,210 |
24 |
| D |
3.0 |
150.00 |
4,296 |
18 |
Let's say you own card "D" and you have
an opportunity to transfer to card "A", nearly cutting
payment in half. What a deal...for the creditor! Check it yourself.
You'll pay six times more interest.
Similarly, transferring a high interest credit
card to one with lower interest doesn't always save you money either
when you consolidate debt. Take a look at this table which assumes
a $5,000 balance.
| Card |
Interest Rate |
% Min Payment |
Total Interest |
Years To Payoff |
| A |
13.5%
|
1.667%
|
$9,538 |
41 |
| B |
15.9 |
2.0
|
9,159
|
35
|
| C |
19.8 |
3.0 |
5,858 |
21 |
Pretend you currently hold card C above at
19.8% interest. If you transferred your balance to either of the
other cards (A or B) to consolidate debt, the creditors would love
you but you are digging yourself a deeper hole.
WHY? In the above example the third
column reflects a lower % of required monthly payment. The lower
the monthly payment percent, the longer the debt will last, and
the greater the interest paid to the creditor. In this case, lowering
the interest by almost 6% nearly doubles the amount of interest
you have to pay... not a smart move.
What matters is, what
is the total interest in dollars you currently will pay versus what
is the total interest in dollars with the debt consolidation loan
when you consolidate debt .
Re-financing a mortgage at a lower interest so
that you can have a lower payment can be the same thing. You must
calculate the total cost in interest to know if it will save you
anything. Remember your "friendly lender" is anxious for
you to lower your payment. Why? A longer loan earns more interest
and you now have more monthly money to borrow still more money.
There is only one way to save money and only one
way a debt consolidation loan can help rather than hinder... payoff
the debt you consolidate as rapidly as possible so that you pay
less interest. Additionally, small amounts can do wonders because
you have compound interest working for you instead of against you.
For example, this is comparison table for a $100,000 30 year mortgage
at 8%. How much could you save with a monthly prepayment of a small
amount?
ACCELERATED PAYOFF
| Mthly Prepay
|
$$ Saved |
Reduced Years/Months
to Payoff |
$15
|
$15,054
|
2 years 3 months |
| 25 |
23,337 |
3 years 7 months |
| 100 |
62,456 |
6 years 2 months |
| 200 |
88,260 |
14 years 4 months |
| 1000 |
137,506 |
23 years 11 months
|
| 2000 |
149,140 |
26 years 6 months |
Some Final Thoughts:
- To consolidate debt so that you can create
new debt is a waste of your effort. You'll be far better off just
keeping your current debt. However, if you slash your debt without
creating new debt, you can operate on cash as if you had a 40%
increase in spending money.
- If you elect to consolidate debt and your
overall monthly payment ends up less, do yourself a favor:
- Determine in your
budget exactly how much you need to "breathe".
- Placed ALL extra money
left over after you consolidate debt and apply it to paying
off the debt as soon as possible.
- Be aware that if a debt
consolidation loan company settles a debt at an amount lower than
you owe, there are consequences. For example, the creditor reports
any forgiven amount more than $600 to the IRS and sends you a
Form 1099 because the forgiven amount is viewed as "income".
It is also considered by potential new creditors as a credit stain
and will survive at least 7 years.
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