Debt Consolidation

Anyone who is paying a lot of interest to a number of banks, credit cards and department stores may be an excellent candidate for debt consolidation. There are a number of reasons why this may be true and also various pitfalls that the average consumer should try to avoid to ensure that they do not end up paying even more interest than they should.

Many consumers have several credit cards, perhaps a department store credit card, a loan for the car, a mortgage, some will have student loans and various other debts that they are carrying. While your mortgage may be at a reasonable interest rate, credit cards and other loans could be at very high interest rates and consumers may be paying much more interest than they should. Credit card companies are notorious for increasing the amount you can charge to their cards, giving you extra time to pay and even giving you a holiday on a payment date. They usually just do this just after Christmas.

How The Interest On Your Debt Adds Up
Stop and take a moment to consider what these various gimmicks may be costing you. Every time you delay payment, the credit card companies get to charge you 18% or more interest on the unpaid balance. Most people cannot earn that kind of income on money they have invested, so you are better off to pay off the credit card and avoid this high interest rate. Department store credit is often even higher, sometimes over 20% a month on interest payments.

If you are paying monthly payments on high interest credit cards, consolidating all of this debt may be the best solution and save you a great deal of money. The best way to find out how much you will save is to add all of your monthly payments together to total the amount you must pay every month. Next add the amount you owe to all of your credit cards and loans. Finally, using one of the online loan company calculators find out how much a loan is going to cost you at the going interest rate for a loan that will allow you to pay off all of your debt. Be careful to select a term for your payments that is comparable to the credit card payments. Most credit card companies will use a 5-year term for purposes of calculating monthly payments for their credit card debt.

Now compare the new loan payment with your current total monthly payments to see what kind of savings you might receive. Note that this is just taking a loan from a bank or lending company without negotiating or even speaking to the loan manager. Most people will find that their savings are significant, especially if they owe a great deal to a number of credit card companies! You can save more by asking for the best rate from the loans manager in many cases.

What To Consider Before You Consolidate Your Debts
There are a number of factors that everyone should consider when they are about to consolidate their debt. The first item is to avoid using a credit card to consolidate other credit cards. Many companies will offer free interest rate periods if you transfer debt from other credit cards. While you may get one or two months free interest time, chances are the credit card you transfer to will charge a higher interest rate on the amount you transfer to it and it will certainly be higher than a loan would be. Over the time it takes you to pay off the balance, you will definitely pay much more interest on the credit card balance than you would on the loan.

Next, once you have consolidated your debt into one loan, cut up those credit cards. Most of us would just keep using the credit cards and next thing we know we have a loan to pay for and all of the credit cards are up to their maximum again. Avoid using them, cut them up, pay cash, lock them away or do whatever you need to do to avoid getting into this predicament again. Note that you will never hear of a bank of credit card company telling you to cut up your credit cards, however if you want to reap the benefits from debt consolidation, consumers have to avoid what got them into this situation in the first place.

Should You Use Your Saving To Pay Down Your Bad Debt
One of the conundrums of finance is what to do when you have debt and you also have savings. Should you consolidate your debt into one low interest rate loan, or should you take your savings and pay all of your debt off. From a purely financial aspect even if you have a loan that is charging an interest rate at 7% and your savings is earning 7%, you are still losing money. In most countries, consumers must pay income tax on the interest they earn, so if you are in the 50% bracket, your real interest rate income is only 3.5%!

In addition you cannot claim the interest you are paying as a deduction, so now you are losing money! For most people the right answer strictly from a financial perspective is use your savings to pay down your debt and consolidate the rest into a loan that you pay off as quickly as possible. The faster you can pay any loan off, the lower the amount of interest is that you will pay. Most lenders will encourage you to take longer terms i.e. longer to pay off the loan so that you pay more interest. They pitch is to keep the monthly payments as low as possible, which is appealing to many people.

Summarizing Your Debt Consolidation
In summary, avoid high interest credit cards, consolidate your loans and credit card balances into one low interest loan, pay off your loan as quickly as possible and use your savings to pay down your debt as quickly as possible. Most consumers will find that they will have more money available to them if they follow this approach.

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