Things You Need To Know Before You Consolidate Debt

By Author: Nicole Anderson
Total Articles: 50
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America is a nation of debt as is very widely known, and debt consolidation business is growing stupendously. However, it is not always that consolidating your debt will be equal.

The debt managing companies that are springing up everywhere offer negotiate lower payments and lower interest rates to pay off your debts. The debtor makes one payment to the debt management company and they gather the payments. The problem is that the debit consolidation leaves your credit in shambles. When you try to get a Conventional, FHA or VA loans after a debt management solution like this you will be treated the same as if you had filed a Chapter 13 Bankruptcy.

Even if the debt is gone, you are now in a cash only financing situation. You will not be able to get cell phone service without a $400 + deposit, let alone the car loan, house or even a rent to the apartment.

Another option to debt consolidation is to get a new loan combining your existing debt and lowering your monthly debt payment. Therefore, if you take a $1000 debt payment ...
... then you can lower it to a $600. This actually works in the following way:

Therefore, here is a debt consolidation example. Take it that there is $30,000 in unsecured debt and the debt breakdown is a 2-year loan for $10,000 at 12% and a 4-year loan for $2000 at 10%. The current monthly debt payments are $517 and $583 for a $10,000 loan and $1100 per month for a $20,000 loan.

So now, the debt consolidation company has been able to lower your payment to $640 per month and your interest rate is 9% by negotiating with your creditors and rolling the loans into one.

So the truth about this consolidation solution is that while the idea of paying $460 instead of $1100 sounds great it will take you 6 years to pay off the loan instead of 2 to 4 years. In addition, the total payment on this new loan is $46080 instead of $40392 for the original loan even with the lower interest rate of 9%. So basically, you are paying $5688 more for the lower payment. Ironic, isn't it?

If you go on to look at the specifics, you will also see that you have suffered more than you think you have. Along with that, your credit will suffer from the size of available credit line and high balance.

So then, if you go to consolidate your debt then you are really in the soup. The statistic is that 78% of the people who consolidate credit card debt have their debt grow back.

The reason for this is that when you consolidate your debt , the individual credit cards have zero balances. Since the root of the financial problems has not been addressed, the debtor will charge the credit cards again. Now the debt has doubled and it won't be paid of fast or easily.

Therefore, the thing that we are advocating through this article is that debt consolidation does not solve your debt issues but instead it increases the exact thing that you want to decrease. So here is a solution to your debt problems, lower your debt and increase your credit score. Moreover, all of you know the way too. Just pay off your debt! This way you will end up outside the debit cycle.

Therefore, the bottom line and the plan to achieve financial freedom is by creating a budget that allows you to make your debt payment. Also, stick to your budget, do not acquire new debit and make sure that all payments are made on time so that you avoid negative credit marks.

Here are some tips to truly handle your debt. If you are behind in the payments, give the company a call and negotiate a way to get back on the track with the lender but also negotiate to have these arrangements to be paid in full and new terms that halt negative credit marks. You should also check to see if you are owed unclaimed money from the nation's missing money to alleviate some financial stress. When you pay off the credit card debt, you reduce your credit limit. In this way, you will not accumulate more debt and will increase your credit score by limiting your available credit. Call the credit card company to negotiate a lower interest rate and most credit card companies will do this if your interest rate is high. It may take threats to transfer your debt to a new company with a lower interest rate. You should make this threat but should actually transfer the debt to the card with a lower interest rate. Also, decrease the credit card limit on the account to a few hundred dollars or close the account.

If the account positively to your credit scores it is not a good idea to close it. That is because you have had it for a long time and made payments on time.

So one lesson that we learn through this article is never, ever to consolidate debt which can lead to numerous problems that will seriously affect your financial condition. Do not let that happen to you. Be wiser and just PAY OFF YOUR DEBT!