What is Debt Consolidation
Credit Card Debt Consolidation
Medical Debt Consolidation
7 Tips About Debt Consolidation
Common Debt Consolidation Mistakes
Debt Consolidation
Risks of Debt Consolidation, Types of Debt Consolidation Loans, Pros & Cons
Balance Transfer or Debt Consolidation?
Debt/Credit Calculators
 
Discussion Forum
 
Credit Counseling and You
Non-Profit Credit Counseling
 
Consequences of Credit Card Default
Effects of Credit Card Default
9 Common Credit Card Mistakes
Eliminate Credit Card Debt in 90 Days
Credit Card Debt
10 Expenses You Can Not Afford If You Have Credit Card Debt
Truth About Credit Card Companies
Should I Tear Apart My $300 Limit Credit Card - The Worst Credit Card Ever?
Disputing Credit Card Debt
401k vs Credit Cards: Where to invest?
 
Debt Settlement Letters
Sample Letters
Write a Powerful Debt Validation Letter
Reputable Debt Settlement Agreement
 
Debt Settlement vs. Debt Consolidation
Dangers of Debt Settlement
Avoid Debt Settlement Pitfalls
Debt Relief Tools/Debt Management Programs
Debt Settlement FAQs
Is Debt Settlement Money Taxable?
 
Reduce Medical Debt
Free Bill Consolidation: Does it exist?
Budgeting to Stay Debt Free
10 Debt Reduction Mistakes
Should I Pay Off my Debt or Save Up for a Down Payment on a House?
Bill Consolidation
Three Secrets to Lowering Your Debt
Tips To Lower Your Bills
 
Government Debt Help
Debt Help During Recession
Debt Relief During a Recession
What Debt Relief Means
 
Pay Off $50,000 Debt
Worried About Bills?
Money & Debt Videos
Report Illegal Collection Activity
Managing Medical Bills
Medical Debt & Bankruptcy
The Facts on Debt
Debt Quotations
Drowning In Debt?
Who to pay first?
Managing Debt FAQs
Medical Debt Solution
12 Hot Tips for Eliminating Debt
7 Debt Elimination Mistakes
2 Ways to Achieve Debt Elimination - Debt Snowball Elimination Method
 
Payday Loan Consolidation
Payday Loan Debt Consolidation
Payday Loan Relief
Default on a Payday Loan?
Payday Loans | Consumer Information
Problems with Payday Loan Stores
Bad Credit Loan Relief
How Payday Loans Work
 
What is Loan Consolidation?
How to get a $50,000 loan
Get an $80,000 Loan
$100,000 Loan for Debt Repayment
Veteran's Home Loan Refinance Options
Government Loans vs. Private Loans
Finding a Government Loan
Student Loan Consequences
 
Reputable Debt Consolidation Companies
Debt Consolidation Company Reviews
Reputable Debt Management Companies
List of Debt Companies in USA
Debt Companies By City
 
How Debt Affects Your Credit
What is shown on my credit report?
Improve Your Credit Score
Correct Credit Report Errors
Can Debt Settlement Ruin Credit?
Can Debt Negotiation Ruin Your Credit?
 
401k Limits
Safe CD Rates
Financial Planning
Banks versus Credit Unions
AMEX Horror Stories
IRS Tips For Audit
Choosing a Tax Preparer
American's not planning for long term care
Understanding Usury Laws
Unemployed During A Recession
FREE Government Grants
Where does money really come from?
 
About Us
Contact Us
6 Payday Loan Debts Owe
Borrow a Loan to Pay Off Payday Loan?
My husband was out of his job and Payday Loans were rolling over

Debt Consolidation Facts

1. If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will identify you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (Fair Isaac).

2. If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

3. Out of a random sample of 3 million American consumers (included in Experian's National Score Index), 51% of them have at least 2 credit cards and 14% of them have 10 or more credit cards.

Risks of Debt Consolidation, Types of Debt Consolidation Loans, Pros & Cons & Zero Percent Debt Consolidation Loans

Over the last decade, we have seen very low interest rates that entice many consumers to take on many different forms of debt consolidation loans (see below) to pay off their existing debt. These types of debt consolidation loans range from Home Equity Lines of credit to Zero Percent Credit Card debt etc. The goal of these debt consolidation loans is to take multiple monthly payments that have high interest rates into 1 low monthly payment with a lower interest rate. It doesn't get any simpler than this huh? Watch out! What you're doing by taking out a debt consolidation loan is a temporary quick fix to your debt problems, you are not treating the CAUSE of the debt; you are merely working on relieving the symptoms.

To prove the above point, we interviewed Chris Viale, GM at Cambridge Credit Corp. in Massachusetts, USA. He says 70% of American citizens who take out home equity or debt consolidation loans to pay off their existing credit card debt end up with similar debt loads (if not higher) almost within 2 years! By taking out 1 more loan together with the tons of debts you already owe, you are merely adding "more fire to the burning fuel" (Chris Viale). What's even worse, most debt consolidation loans that are advertised out there on the market are meant for people with good credit history and a good credit score. Thus, if you have a huge debt load, this means your credit score will be lower and you most likely will not qualify for these low interest debt consolidation loans. Below, we will describe a few types of Debt Consolidation Loans that consumers can take out, their pros and cons and how exactly they work.

Video: Suze Orman - How to Settle Debt on Your Own

1) Home Equity Line of Credit

We have written a detailed review of home equity lines of credit here. The definition is:

A home equity line of credit is a line of credit borrowed with your home as collateral. Therefore, if you fail to make payments on the borrowed credit amount, you will forfeit your home as it has been pledged as collateral. Because your home is probably the biggest asset you will ever own, most people use a home equity line of credit to pay for large education bills, home improvement costs and unexpected big medical bills. A home equity line of credit is not used for your day to day living expenses, typically, as it could jeopardize your home ownership.

debt consolidation risks

To add to the definition, a home equity line of credit can also be used to take out 1 bigger debt consolidation loan to pay off large credit card debt balances. The biggest risk to this is that you could literally lose the biggest asset you ever own, your home! Diane Giarratano, Educational Director at Garden State Consumer Credit Counseling in New Jersey quotes, "Some hardship occurs and now they have double the debt and if it's secured by their home, they could lose it."

The advantage of taking out a home equity line of credit to consolidate debts is that the interest you pay on these loans is tax deductible. Of course, tax breaks are always a nice thing! If you apply for a home equity line of credit at any bank, they will determine the total amount you can borrow taking into account the value of your home, what % of your home you own (and what mortgage you have left to pay off). Diane Giarratano, Educational Director at Garden State Consumer Credit Counseling in New Jersey says, "Banks will tell you how much you can borrow. That doesn't mean you should borrow the total amount, but that's what people do."

2) Zero Percent Credit Card

A zero percent credit card (0%) debt consolidation option is available to people who do not own their own homes and cannot take out a home equity line of credit. Generally, a 0% credit card is available to people who have a good credit score and good credit history. So this option is not for you if you have a bad credit history. What exactly is a 0% credit card? A 0% Credit card is a card that carries 0% interest (you will virtually pay NO interest) for a maximum of 1 year. In this 1 year, you can take full advantage of this feature by paying off as much of the Debt as you can possibly can.

debt consolidation

For example, consider the following scenario: John owes Credit Card debt of $20,000. The Annual Percentage Rate (APR) on this debt is 18%. Using common debt consolidation calculators, we derive the following amortization schedule of interest & original principal debt payments. If John makes monthly payments of $600, he will pay $300 in Interest charges in the 1st month. Only $300 out of the $600 debt payment will go towards paying off the $20,000 debt. After making 10 payments of $600 each, John will have paid $3210.82 towards the Original Principal and $2789.18 in Interest Charges.

Month

Payment

Interest Paid

Principal Paid

Remaining Balance

1

$600

$300

$300

$19,700.00

2

$600

$295.50

$304.50

$19,395.50

3

$600

$290.93

$309.07

$19,086.43

4

$600

$286.30

$313.70

$18,772.73

5

$600

$281.59

$318.41

$18,454.32

6

$600

$276.81

$323.19

18,131.13

7

$600

$271.97

$328.03

17,803.10

8

$600

$267.05

$332.95

17,470.15

9

$600

$262.05

$337.95

17,132.20

10

$600

$256.98

$343.02

16,789.18

Totals:

$6000

$2789.18

$3210.82

 

However, if John had taken out a Zero % Credit Card, his amortization schedule would like this. As you can see, after making monthly payments of $600, John will have paid $600 towards the original principal of his debt, and 0$ in Interest charges! If his interest rate was 18%, at the end of 10 months, he would still have a remaining balance of $16,789.18. However, if his interest rate was 0%, he would reduce his debt to a low $14,000 in just 10 months! See how a 0% credit card can really cut the deal?

Video: Debt Consolidation Can Lower Your Debt

Month

Payment

Interest Paid

Principal Paid

Remaining Balance

1

$600

$0

$600

$19,400

2

$600

$0

$600

$18,800

3

$600

$0

$600

$18,200

4

$600

$0

$600

$17,600

5

$600

$0

$600

$17,000

6

$600

$0

$600

$16,400

7

$600

$0

$600

$15,800

8

$600

$0

$600

$15,200

9

$600

$0

$600

$14,600

10

$600

$0

$600

$14,000

Here's a few pitfalls that could get you in trouble if you take out a 0% credit card:

  • 0% credit card is only offered to people with a good credit score and good history. Also, a 0% credit card can only be offered for a limited period of time, so you have to 100% advantage of the feature!
  • If you make only the minimum monthly payments required on your debt load even after you have a 0% credit card, forget it, it's not working!
  • The two above amortization schedules we presented take into account that you will NOT be tacking on any more debt to these credit cards.

3) Debt Consolidation Loan

Debt consolidation loans offers are spammed into our inboxes every single day. The advantage of taking one out is that a debt consolidation loan will take 20 of your different credit card lenders, combine them all into 1 single monthly payment with a lower overall interest rate. At least, that's the theory. Before you take out a debt consolidation loan, verify the following things:

  • Read the fine print of your loan agreement to see whether the savings from the loan really exist. Add up all the closing & financing costs of the debt consolidation loan and determine if the total payments you will be making are really below what your original payments are. If not, avoid taking out that loan. Use the Calculators - Do It Yourself Debt Consolidation Section to help you out in this.
  • Check the overall interest rate you are getting is actually lower than your current interest rates.
  • Check if the lender is allowed to bump up the interest rate if the loan is unsecured (meaning there is NO collateral such as your house or your boat attached to it).
  • Credit Unions are more lenient in offering debt consolidation loans than banks, so try them out first.
  • Learn what to watch out for when borrowing money.