Debt Consolidation Tips To Get You Out Of The Hole

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So you are loaded with all kinds of debt from student loans, mortgages, even a loan on your car. Then there are all those bloody credit cards. Deep in your heart dwells the suspicion that all this borrowing is probably costing way too much. The fact that you are virtually penniless at the end of the month confirms your suspicions. Things are pretty desperate. 

You decide to take matters in hand and Google “debt consolidation”. The first five entries that pop up claim to be professional debt consolidators, several even claim A+ ratings from the Better Business Bureau. They all claim to be a solution to your debt problems. But, are they really worth it?

Nowhere is there a hint of what actual service is provided. Worse yet, there is not even a suggestion how much these services cost. Remember nothing is free and unless you want to add another creditor to your list, read on.

Anybody with the slightest mathematical inclinations can work down the cost and amount of debt. The only tools you need are a calculator and some common sense. We will give you ideas on how you can not only become a financial do-it-yourselfer but also get the job done in half the time.

1. If We Had Common Sense We Wouldn’t Be In This Mess

Debt Consolidation Tips

Let’s start with common sense. By debt consolidation, what we are really aiming for is debt reduction. Many times people think of consolidation as a way of lowering their monthly payments, then immediately spend the extra cash. This practice defies common sense, but it happens all the time.

Of course there are those emergencies like a trip to the hospital ER. This will challenge anybody’s ability to stick with a budget. But the fact is most families either do no have a budget or they don’t make a realistic budget. But with US consumer debt now at more than $1 trillion, there is a clear message.

Families are simply spending far more than they are earning.  So when we talk debt consolidation let’s deal with the truth. Spending reduction is a big part of the first step in the process.

2. The Buck Starts With Quarters

Add up all of your debit and credit card spending over the past six months; deduct things like food, personal care items like toothpaste, shampoo etc and then look at what is left. Without even seeing your list, it’s a good bet that anywhere from $100 to $1000 or more (depending on your income and other factors) can be chopped without any sacrifice to health or well being.  Apply that amount to your current debt.

The next step involves spending discipline. Take all your credit cards, except for two or three with low balances and put them in a safe place, or simply cut them into small pieces.

3. Look for Zero Interest Balance Transfer Deals

Debt Consolidation Tips

Next, call each of your Credit Card companies, explain that you are in a tight spot and don’t want to hurt your credit. Do they have a better interest rate to offer you? Here you have a good spot to negotiate.

Explain to them that your spouse was just offered a 12 month zero interest rate credit card. You are just moments from transferring your high interest rate card into this zero-rate from a competitor bank. With the risk of loosing your 28% annual interest rate income, you might be surprised at what they come up with.

4. The Credit Card Demons Are Out To Get You

Absolutely no doubt, credit cards and other unsecured personal debts carry the most outlandish rates of interest and represent a financial demon to get off your back.

The basic principal of debt consolidation is to free up every penny of cash that had been paying interest and divert this into paying down the principal. Credit card companies don’t want you to do this; it is against their selfish interest. It is well known that if you have a $10,000 balance on your MasterCard at a 28% APR (annual percentage rate) and pay just the minimum amount each month, you have a decent chance of dying before the balance reaches zero.

5. Traditional Techniques: Out With The Old

Debt Consolidation Tips
Try This

Credit Karma

Back in the days before the 2008 financial crisis, debt consolidators offered the same standard advice. Because the principals are still very much valid today, we are including it in the article for one reason. It is a good discipline to incorporate into your financial thinking. So here we go.

Take all your credit card monthly statements and arrange in order of interest rates, highest to lowest. Pay the minimum on all the cards except the cards with the highest rate. We are going to attack paying down the principal on this card as though it is a sacred mission. Once that is accomplished, simply apply the same approach to the next highest card.

If you have a FICO score between 650-700 chances are your high-end rate could be 24% -28%. Pay the highest down to a zero balance first, and then tear up the CC. If your FICO is in the 600-650 ranges, rates could be as high as 36%. If this sounds like loan sharking, well, it is. Credit card companies know how to get around these issues.

As you pay down your ultra high cost credit cards, something interesting will start to happen. Your FICO score will begin to rise. A higher FICO score gives you the opportunity to go back to the credit card companies that you still owe money to and renegotiate for a lower rate.

The website BankNote.com is a great source for credit card deals for virtually every FICO score. So if your bank doesn’t want to play ball with you, there will be others with deals that will keep you diverting money spent on interest into paying down principal.

6. Modern Finance: Modern Technology

The principal of paying down the highest cost debt is a common sense approach but can take five years or even longer depending on unpredictable events. A faster approach that can compress the process into as little as 24-36 months comes from the exploding business of direct lending. These are companies like Lending Club and Prosper.com. More recently Goldman Sachs, the Wall Street giant has entered the field with Marcus.

The interest rates these groups charge is typically well below issuers of Visa and MasterCard and approval and funding can be as little as 48 hours. You may not qualify to consolidate all your credit cards so, once again, pay off the highest rates first.

The business has become increasingly competitive and that is great news for borrowers so shop around before making a commitment.

Lending Club

Lending Club is America's #1 credit marketplace. Apply for a low, fixed rate personal loan.

7. Time For Some “Me” Time

Quite often we watch people roll their eyes and respond with the comment, great advice but when will I ever find the time to do all of this. If that is your view, it is time to schedule some more me time. After all, this is all about you anyway.