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high interest rate

Would Debt Consolidation Work For You?

April 13, 2009

in Personal Finance

If you have a multitude of credit card bills, one option you can utilize to pay off most of them is through debt consolidation.

For example, let’s assume you have several credit cards with high interest rates. The monthly payments are becoming more difficult to pay, and you feel as if the hole you are in is getting deeper and deeper. There are several options available to you.

First, you can consolidate the debt by taking out a home equity loan. If you have a good credit rating, meaning the FICO score is 700 or more, your chances of obtaining a loan are very good.

Second, you can obtain a loan from your bank. Again, depending upon your credit history, the amount and interest rate will be determined accordingly.

Third, you can call each credit card company and renegotiate the interest rates.

Finally (and this is the last resort), if you have a credit card that is offering a very low interest rate, and if the interest rate will be set for more than a year, then you can use that card to pay off the high interest rate credit cards and just have one credit card bill to contend with.

If none of these options are applicable, the best advice most experts offer is to seek credit counseling with a certified organization. This can help you reduce the interest rates, and perhaps work out a repayment plan with these companies to give you some breathing room.

However, the key to debt consolidation is that once you have paid off the majority of credit cards, it is incumbent upon you to cut up those cards (except one that should be kept for emergencies) and vow never to apply for new credit cards or begin using the ones you have paid.

If your credit is not considered the best, you can also ask a family member to co-sign a loan or, as mentioned earlier, take out a home equity loan. However, with the value of homes in decline, it may serve you well to apply for a loan from your bank instead.

Debt consolidation can work. Consider that if you apply for a loan, the monthly payments will always be the same. The interest rate given at the outset will largely depend on your credit standing. But the clear advantage is that there is only one bill to pay each month over a period of time.

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Tips for Paying Off Credit Card Debt

April 10, 2009

in Personal Finance

Experts will tell you that the best way to pay off credit card debt is to make a list of your credit cards with the highest interest rates cards first. Then, for the card at the top of the list, pay off as much as possible each month instead of making the minimum payment.

When that card is paid off, move on to the next high interest rate card and follow the same procedure. This is known as the “snowball” process.

Of course, if you choose to pay off credit cards with smaller balances, that’s fine too. But those high interest rate credit cards can keep you in debt for years and years.

Here’s an example. According to Bankrate, “Paying just the $60 minimum payment on a $3,000 credit card balance would take eight years to pay off and cost a person a whopping $2,780 in interest. By paying an additional $50 a month, the debt would be paid off in three years and they would be spared $1,800 in interest charges.”

In today’s economy, this may seem a daunting task. However, considering that the unemployment rate is rising, more home foreclosures are expected, and not only banks but corporations are facing major financial problems, it is important to have the least amount of debt possible.

Will it be easy? No, it will not. Sacrifices will probably have to be made. Family budgets will have to be addressed once again to determine where additional funds can be put toward credit card debt.

In addition, in order to save money to pay off the debt, Bankrate advises that you follow these recommendations:

* “Brown bag ten lunches per month
* Have movies and popcorn at home instead of going out
* Use coupons for groceries and buy store brands
* Make pizza at home instead of ordering out
* Buy in bulk and freeze dinner entrees
* Give handmade cards and gifts
* Shop at consignment, thrift and discount stores”

There are additional measures you can take to increase the amount of money you save each month, including:

* Becoming more energy efficient
* Bundle the cable, phone, and internet
* Call credit card companies to have interest rates lowered
* Eliminate magazine and newspaper subscriptions
* Eliminate unneeded telephone services
* Increase insurance coverage

Anything you can do to begin to pay off your credit card debt will only serve to help you in the coming months and years. Most economists assert that the economy will only get worse before it gets better. It is incumbent upon you to be prepared for any eventuality, including setting aside money for any emergency that may occur.

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