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Do’s and Don’t’s of Debt Consolidation

Question:

Dear Bob

I am looking for the best way to try and consolidate about 30k in credit card debt. Any suggestions? My credit is pretty good now, and I am making my payments on time; however, my monthly payments to all my creditors exceed $1000 per month.

Answer:

When you have quite a bit of debt that you are paying off, it is without question a huge blessing to have good credit scores. That gives you options - This reader has excellent credit scores - so should she consolidate?

There are only two reasons that you consolidate -

  • Better interest rates - The amount of interest and the amount of money you are paying each month are going to be the two key determining factors as to how long it takes you to get out of debt.

You want to pay back as much as you can. Higher interest rates will require you to pay back much more.

  • 0% plans - a great concept; however, you have to do the math. Does it make sense after you evaluate the interest you are paying after the 0% period plus factoring in the 3% transfer fee? You need to make sure that you can pay back a bulk of that money during the 0% time period.

When should you not consolidate?

  • For the sake of convenience - in the email, it sounded like the thought of one payment sounded much better than multiple.

  • To lower the payment - if you consolidate into another plan and the payment is much lower, one of two things are occurring -you did get a much lower interest rate which is good, or they extended the term of the note out further which is something that you don't want to do.

Paying back debt is no fun. However, staying the course and making a commitment to that high set of payments and making sure your interest rate is as low as possible ensures that you get out of debt as quickly as possible.