The TecBlast Blog

Is debt consolidation the best option for me? With times as they are, there’s a real requirement for those with debt problems to understand the differences between consolidation and the various other options available - and understand which one could be right for them at a time like this.

Firstly, it could depend on what the future holds. In a recession, it’s more likely to be bad news - when consumer spending drops and companies lose money, many companies can be forced to make people redundant just so they can stay afloat. For anyone thinks their employer is thinking about laying off staff, a debt consolidation loan might not be a great idea.

One of the most attractive benefits of consolidating debt is its ability to reduce a person’s monthly repayments. Debt consolidation is most effective when the person is in a reasonably stable financial position: when they know what’s coming in and what’s going out, they can figure out the best way of repaying their debt.

With a stable income, the debtor can calculate how much they can afford each month, and arrange to repay the debt consolidation loan at the correct speed - not too slowly and not too quickly (stretching their monthly budget dangerously thin).

So someone facing the prospect of being out of work could be better off looking into a debt management programme, rather than debt consolidation. DMPs offer a flexible approach to debt: borrowers can ask debt advice advisers to negotiate with their creditors on their behalf, asking them to agree with more flexible repayment terms.

A debt management programme is an informal agreement that isn’t legally binding, so someone on a debt management programme can ask the debt management company to go back to their creditors if their financial situation worsens - if they lose their job, for example, their debt management company can ask their creditors if they’ll accept nominal payments for a while, until they find new work.

Individual Voluntary Arrangements take a lot of commitment and can require homeowners to free up some of the equity in their property. Borrowers must be able to commit to making fixed monthly payments for (normally) six years, based on the maximum they can afford once they’ve taken their essential expenses into account. Even so, an IVA can make all the difference - for people whose debts have gradually got out of control, as well as people faced with a sudden drop in income. Of course, IVAs do require a level of financial stability: if the individual doesn’t feel they can commit to five years of regular payments, an IVA may not be the right option for them.

Having multiple credit cards can end up being both somewhat of a
blessing and somewhat of a curse. In most cases, it ends up that
the cards with the highest interest rates are the ones that
carry the largest balances while the ones with the lowest
interest rates are the ones that go unused much of the time.
Luckily, many cards allow for the balance of one to be
transferred to and from other cards to make keeping your
finances under control much easier than it might seem at first.

The information provided below should help you to learn more
about the process of transferring balances from one card to
another and assist you in making the decision as to whether or
not you should transfer your balances.

Defining Balance Transfers

Balance transfers are simply the movement of all or part of the
balance of one credit card to another, usually from a card with
a higher interest rate or a card that is near the credit limit
to one that has a lower interest rate or that is nearly or
completely paid off. This allows you to avoid going over credit
limits, gives cards that have been used a lot a little more use
before having to begin paying down the balance, and helps you to
avoid paying the higher interest rates on older cards.

How Balances are Transferred

The actual act of transferring a balance is relatively simple…
the amount that is being transferred is charged to the card that
the balance is being transferred to, and the corresponding
amount is credited to the card that the balance is being
transferred from. Some cards allow a transfer to be credited as
a payment, whereas others do not… make sure that you know
whether your cards allow this or not before assuming that the
transfer will count as the payment that is due on your card.

The Best Time to Transfer Balances

Often the best time to transfer balances from one card to
another is before the next month’s balance and payment has been
figured, because the lower the balance that you carry on
higher-interest cards then the less interest will be charged to
the card as a result. Transferring balances during promotional
interest periods can also be good, allowing you to pay a much
lower interest rate on the transferred balance and giving you
more time to pay down the balance before the greater interest
rate comes into effect.

Saving Money with Balance Transfers

One of the main advantages of balance transfers is that you can
often save quite a bit of money when transferring the balances
to a card with a lower interest rate. Balance transfers can help
you to avoid fines associated with going over your credit limit,
and by using a bit of common sense you should be able to keep
your credit card debts under control and transfer the
appropriate balances to enable to pay off your outstanding
balances more quickly and for the lowest interest rates
possible.

Balance Transfers with New Cards

When applying for a new credit card, many cards will allow you
to transfer the balance from older cards as a part of the
application process. This can be especially useful when done
with cards that offer a low fixed rate for an introductory
period, because you should be able to make quite a bit of
headway in paying off the older balances at the much lower rate.
Use caution, however, or you may end up with a new card that’s
mostly full when it reverts to its standard rate.

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It doesn’t take much for you to get behind on monthly bills, but it sure takes some time to catch up. The comparison in my mind is to weight gain. A one-week vacation can easily pack on 5 to 7 pounds. Losing that weight however, can take a good month of cardio. That’s no fun, and neither is trying to find the extra cash to pay last month’s credit card payment.

Every financial professional’s suggestions in regards to budgeting seem so simple. Five percent to savings, thirty-five percent to housing expenses, ten percent for food…tell me honestly, am I supposed to put all my cash in individual envelopes and label them with their assigned debt? Let’s get real here. Debt is an overpowering epidemic in America. It’s growing every year. I think its time that someone actually made sense out of it all.

If we start in the beginning, it is important to make a budget for your household. Start with any program you like. Try shopping around online for different budgeting calculators. Once you find one that work for you, start making it realistic. It’s easy from an outside standpoint to put everything in a box of percentages. What if your numbers don’t add up? It’s time to think outside the box.

When considering housing expenses, you may be over your limit. An average target is 35%. If you own your home, you can’t just sell it and move back with Mom and Dad to save money and refinancing may cost you more in closing costs than you are actually saving. If you need a little extra in one part take it from another. Reduce some of your more flexible expenses like a cell phone bill or clothing costs. Find a less expensive plan and shop the sales at the department stores.

As far as money allotted for paying down debt like credit cards and student loans, you can shave a little off of savings until the balances are paid down or paid off completely. It is important with credit card debt to pay more than the minimum amount due, otherwise you are paying mostly interest and very little of your balance. Student loans however can be paid off in minimum payments without costing you enormous interest rates.

Food expenses should average about $150 monthly per person. This is the total amount including grabbing a bite to eat at the local restaurant. Look for sales at the supermarket and cook at home more often. Frozen and gourmet prepared foods are more expensive than home cooking. Break out the recipe book; your family may just thank you for it.

You realize the basic idea, but what if you don’t fit into this category either. If your debt is far less manageable you can contact your local Consumer Credit Counseling Service or a debt consolidation company to help you get back on track. If your credit is still in good shape you may be able to get a low interest loan to consolidate debt yourself with monthly payments you can afford.

It’s understandable that with today’s busy schedules and the high demands placed on the working family that the last thing you want to do after a long day is to work on your budget. Unfortunately money problems don’t go away by themselves. Either deal with them head on and find a way to work through them or they will catch up with you.

Jason M. Rigler
Cash now for future payments