Help with debt and credit card consolidation

Edwards Finance > Debt Consolidation

Q. I'm seeking help on managing my credit card debt. Currently, I owe about 12,000 on 8 credit cards and paying interest rates between 18-29%. I'm thinking about consolidating this amount to a lower interest rate. About a week ago, I received a phone call from a consolidation company soliciting their business. They qouted me a 6-10% interest rate on each of my credit card and a payment of 360.00 a month. They also told me that I would be charged 40.00 each month which would already be included in the 360.00 payment amount. I didn't apply at the time because I've heard that alot of these companies are scams and that alot of people who signed up ended up with more problems and paying a lot more than their preconsolidation amount. I'm not sure what to do at this point as I don't know too much about consolidation and which companies are ligitimate. If anybody is familiar with consolidation and know of any legitimate companies, please help me !

A. $12,000 isn't all that much, in the scheme of things - less debt than you'd take on, most likely, if you bought a new car. But those interest rates are a killer. You don't give us much to go on, but you're asking for advice, so here's what I'd suggest. The absolute first thing you have to do to get out of debt is to not incur any more debt. If you simply must use one or another of these cards, you absolutely must pay off all current charges when you get the bill. It's OK to use a card as a substitute for cash, but at the end of the month, you have to pay for everything you've charged. Now take the statements and lay them out. We can assume from what you've posted that you can afford to put $360/month toward getting out of debt (that $360 is not for paying off what you charged this month, it's in addition to paying off what you charged this month). You can go one of two ways. 1. Pay the minimums on all the cards except the one with the highest interest rate. Put the balance of the $360 against the card with the highest rate. When that card is paid off, cut it up and close the account. You don't need to be borrowing money at 28% anyway. Continue doing the same with the remaining accounts - pay the minimum on all but the highest rate card, pay off the highest rate card, and get rid of it. It could be that you owe the most on the highest rate card, and relatively little on one or two of the others. Proceeding as above might be discouraging because it will take a long time to pay off the highest rate card. So some people find it easier to use the second method. 2. Pay the minimums on all cards except the one with the lowest balance. Put the remainder of your $360 against the card with the lowest balance until it's paid off. Continue with the remaining cards. Method one will cost you the least amount in the long run unless it just so happens that you have lower balances on the higher rate cards. Method two might be psychologically easier. Using method one, you might keep the last one or two accounts - credit cards are useful, and even essential for some things (try renting a car without a credit card), if used with just a bit of prudence. Some people might object that not using a consolidation company like the one that solicited you over the phone means you'll end up paying more in interest. But they're charging you a $40 fee on the $320 payment (for the total of $360). That's equivalent to 12.5% interest. Assuming you have roughly equal balances on all your cards, you're paying "blended rate" of around 23%-24%. If they get your rate down to 10%, you'll be effectively paying 22%. In addition, as you pay off the higher rate cards, your blended rate will go down until you're on your last card, when you'll be paying 18%. If you use this company, you'll be paying that effective 22% all the way through. I don't know if the company is legitimate or not, but even if they're completely above board and can and will do everything they claim, in my opinion it's unlikely that they'll save you a dime. Whatever you do, realize that you're looking at several years to pay this stuff off. If your interest rate was zero, it would take almost 3 years to pay off $12,000 at $360/month. Your interest rate is a long way from zero, so if you can afford to put more towards your debt, do it - the quicker you pay it off, the less it'll cost.

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