Mar 2012


Six Tips to Calculate if Debt Consolidation is Right or You

Author : admin

Millions of people in the U.S. are overwhelmingly struggling to get out of debt. Many see debt consolidation as the most feasible debt relief option. It is true that debt consolidation can merge multiple unsecured debts into a single, more affordable debt repayment. This debt management strategy is essentially achieved by getting a low interest loan or entering in a debt repayment plan. But, the debt consolidation approach may not be the best approach for a number of financial situations.

The following tips will also help you determine whether if debt consolidation is suitable to your financial needs:

1. Before trying debt consolidation, verify the APR charge on your most recent credit card statement. If the interest rate is too high, approach the credit card company and ask them if they can lower the interest rate. Generally, credit card companies will consider lowering the interest rates if the cardholder shows an excellent payment history and has only used up 30% or less of their credit limit. But, if you’ve maxed out your credit line, negotiating with your credit card company will be a futile effort.

2. Before applying for a debt consolidation loan, see whether the average interest on your outstanding balances is at least 6% higher than the interest on the prospective consolidation loan. Note: if the interest rate reduction isn’t high enough, the new payment plan will barely make a dent on the existing credit card minimum payments.

3. To determine if you can afford to make the new debt consolidation loan payments, make a list of your income and expenses and see how much of your income can be applied toward the new monthly debt repayments.

4. Determine the duration of the prospective debt consolidation repayment. There are many online financial calculators that you can use to calculate the term and interest charges of the new repayment plan.

5. Compare the services offered by different debt consolidation companies. Before you hire a debt consolidation company, verify their fees as well as what they propose to lower your interest rate charges. This will determine your new monthly payments and the duration of the debt management plan. Some companies charge a monthly fee based on a percentage of the new payments being remitted to the credit card company.

6. A less consolidation option is to take out a home equity loan. This loan approach can pay off high interest debts via a much lower interest rate. Plus, the interest payments on a home equity loan are tax deductible. However, there are a number of variables to digest when trying this option. First of all, you must own a home with a great deal of equity. Secondly, the interest on the home equity loan must be substantially lower than the interest on your credit card accounts. Finally, you need to calculate the duration of the home equity loan repayments against the remainder of your credit card minimum payments. If the potential savings of the loan aren’t significant, it’s not worth the risk, for if you miss a loan payment, your home can go into foreclosure.

Wikipedia is another fine source to research the above topic as well as a Debt Free League financial adviser. You can call them at 1.800.213.9968 and for no cost, they can explain to you the “pros and cons” of debt consolidation and other debt relief options.

Share This Post


  1. Charlene says:

    Thank you for the valuable information. What are the effects of doing a debt consolidation on a credit rating?
    I had never heard the 6% lower interest rate rule, but that makes a lot of sense. It’s good to have numbers to be able to figure out if debt consolidation is worth it, or if it will just put you back in the same place you started.

    • admin says:

      Answering your question, debt consolidation via “enrollment” in a credit counseling debt management plan has no adverse effect on your actual credit score. Nevertheless, it does hurt your credit standing! It shows on your credit report that you enrolled in a “debt management hardship plan.” Sadly, this a red flag labeling that admonishes prospective lenders that you were unfit to manage your own debt. Additionally, until creditors accept the proposal for interest-rate reductions from a debt management plan, “late payments” may show on your credit report.

  2. Amanda Chase says:

    Since you said it harms your credit rating, how long does it stay on your report? Does it get wiped off after 7 years? Debt consolidation sounds like a good plan (and I also had no idea about the 6% lower interest rate rule either) but it hurts your credit rating like bankruptcy does, but if you are desperate what other choice do you have?

  3. Jen M says:

    It is one of those situations that you are darned if you do and darned if you don’t. A debt consolidation program is an ideal in many ways but in the long run it is not a good thing due to ruining your credit rating. Perhaps there are some lenders that would overlook that if the score is good?

    • admin says:

      Perhaps in few cases. Keep in mind that even if the person has a decent credit score, the issue is that his/her credit reports will show enrollment in such a debt relief plan. That is basically a warning sign for a potential lender to stay away.

  4. Miriam says:

    I have no idea if the 6% applies in Canada. It probably does. Back when I had the issues with debt and I looked into debt consolidation. However, even though it appeared convenient I was warned that my credit rating would indicate it for a long time and I chose not to do it for that reason. Then again my credit rating has suffered anyway because of the debt so I should have saved myself trouble and gone through it.

    • admin says:

      Unfortunately, many folks find themselves in similar catch 22 situations, damned if you do, damned if you don’t. You either get zapped on your credit report due to the negative labeling or due to a high debt to credit ratio. But, the main idea to optimize the health of your credit is to eradicate your debt load as possible. Doing so will bring your balances to ‘zero’ debt, which can improve your credit score by about a third.

Leave a Reply


Social Widgets powered by AB-WebLog.com.