7 Ways to Consolidate Debt.

Posted on | November 17, 2008 |

7 Ways to Dump Your Debt

* Transaction costs.
I’ve seen a few transfer offers that charge nothing for the honor of assuming your debt, but most offers charge 1-3% of the balance being transferred. Anything more than 3% is a rip-off and should be avoided if possible.

* Continued spending.
If you can’t stop charging new debt, you’re only digging deeper in the hole and when that rate reset timer goes off it’s going to hurt - way more than the alarm clock on exam day after pulling an all nighter! Balance transfers with low teaser rates are best viewed as a temporary time-out on the interest clock. This time-out should be used to get your affairs in order and change the habits that got you into debt in the first place, so when the clock starts up again you are on better footing if not in the clear completely.

* Payment shell game.
One very important question you want to ask regarding any transfer offer is: where do my payments go?

Many credit card companies will apply any payments you make to the debt with the lowest rate, regardless of age. So, all your extra payments will go toward the 0% debt while any new charges you may have made keeps growing at the regular rate of interest for the card. Best thing to do here is never use the card until that original transfer balance is paid in full.

Despite the potential pitfalls of a Credit Card transfer, they can be valuable. I made use of a 0% transfer that was integral to getting out of credit card debt, and I’ve stayed out of credit debt ever since.

2. Home equity loans.

Home equity loans are usually favored over other methods of consolidation because they tend to have lower interest rates and they may be tax deductible. See your tax professional or check out the IRS website for more details. The major downsides to Home Equity loans are that you have to have a house (i.e. not available to renters), the rate may be adjustable, and if you borrow too much you may end up owing more than the house is worth.

3. Your bank or credit union.

Getting a personal loan from a bank is always an option, and Credit Unions typically offer lower rates than banks. If you’re lucky enough to be a member, you should definitely check it out. Just be careful not to roll multiple debts into one debt that you’ll be paying off twice as long as the original debts.

4. 401k loan.

Bad Idea. You pay all kinds of ways borrowing from your future to pay for the past. For starters, all the while your money is out of your retirement fund, it isn’t growing. You’re treading water while still being pulled towards retirement. And if you don’t pay the loan back within 5 years, the IRS can tax and penalize you. But the biggest reason in my mind not to borrow from a 401(k) is that the loan is due upon termination. If you lose your job, or find a new job you must pay that loan back within 30-90 days. Not being able to find a new job because you can’t afford to repay the loan? I call that indentured servitude.

5. A nonprofit consumer credit counseling agency.

If you must go the credit counseling route, be sure it’s nonprofit. You don’t want to be making yet another person rich off your misery. The U.S. Federal Trade Commission website has an excellent resource for finding and working with credit counseling agencies. It’s called Fiscal Fitness: Choosing a Credit Counselor

6. Family and friends.

This may work for some people, but there are so many more stories of failure that I would never consider this. Not to mention, when things go badly you’ve just polluted relationships you most likely hold dear.

7. Renegotiate the terms with your primary lender.

I love this one. Most lenders don’t really want to break you financially, they just want to make money or at the very least not lose a lot of money. Think about this: what’s in it for your credit card company if you go bankrupt and can’t pay them any of the money you owe them? That’s a lose-lose situation. You want to make it a win-win situation, so cut a deal with your creditor.

Explain that you simply can’t repay the money under the current situations, but you absolutely want to pay back your debts. Make this last point very clear. If they think you’ll attempt to walk away from your debt obligations, you’re back into bad territory. You may be able to negotiate a lower owed amount or lower interest rate. You may even be able to negotiate a interest rate freeze for a limited time - thus creating your own 0% transfer without the transfer. Of course you’ll have to make some concessions in the bargain, so be prepared to agree to pay a certain percentage or amount each month. If you can make it automatic, that may be a selling point too.

Photo by Daveybot

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