What Does Credit Consolidation Mean?
Are you overwhelmed by your credit cards? If you feel like you cannot keep up, one effective way to ease the stress is to consider credit consolidation. There are several strategies to accomplish credit consolidation, and there are many benefits that arise from the choice of credit consolidation.
First, what does credit consolidation mean? credit consolidation can take many forms, and means different things to different financial advisors, so we will go through each one in turn. One form of credit consolidation is to take out a personal loan and use the proceeds to pay down your existing credit cards. Another form of credit consolidation is to do a balance transfer; this involves applying for a new credit card which will allow you to transfer all the balances from your existing cards onto this one new card. Both of these means of credit consolidation involve opening an additional unsecured credit account.
Another way to pursue credit consolidation, available for homeowners, is to look into borrowing against your home equity. One way to do this is to take out a Home Equity Line of Credit (HELOC), which is a credit line against the equity in your home. You would then use the proceeds of this new loan to pay down all of your credit cards. Another way to take advantage of the equity appreciation in your home for credit consolidation is to refinance your existing mortgage. As part of this refinance, you would use some of the proceeds to pay off your existing credit cards. This type of refinance credit consolidation is often called a debt consolidation refinance – you are consolidating both your old mortgage and your existing credit cards into one new mortgage.
Now that you understand what the different forms of credit consolidation are, it is important to understand the benefits of credit consolidation.
•Lower Interest Rate: Perhaps the most significant benefit that results from credit consolidation is that the new account that you are opening will carry a lower interest rate than the rates on the credit cards that you are paying off. This means that it will cost you less over time to pay off your debt. If your credit is strong enough, you may even qualify for a 0% balance transfer, which means that you will not have to pay interest charges on your debt for a set period of time. Moreover, a secured loan (e.g. mortgage refinance, HELOC, etc.) will generally have a lower interest rate than your existing credit cards.
•Faster Repayment Period: Along with saving money over the long term by lowering your interest rate, you will also more than likely be offered a lower monthly payment. This may be very attractive given your current financial situation. However, if you are able to maintain your present monthly payment amount after doing a credit consolidation, you will be able to pay off the new balance much more quickly than you would have with the old credit cards.
•Ease of One Bill: Another very important benefit that comes with choosing to undertake credit consolidation is the simplicity of having one monthly bill that comes with the new account that you have opened. With multiple credit cards you are receiving multiple bills, more than likely with different payment due dates throughout the month. Not only is this difficult to keep track of, it also increases the likelihood that you will miss a payment and end up paying late fees and incurring higher interest rates. It is easy to see how one monthly bill can lower your stress level considerably!
These are just some of the reasons credit counseling can make sense. Most importantly, be sure to know what your own goals and priorities are, and then select the form of credit consolidation that best fits your own needs.
How to Improve Your Financial Literacy
Behavioral economist Meir Statman, recently said ’getting out of debt is the financial equivalent of trying to quit smoking.’ Just like any bad habit, good intentions alone will not be enough. To ensure success, we need to break our underlying patterns of behavior. How is it we live in the richest most powerful country in the world, but the average American is more than $11,000 in debt. Our European friends who live by a mainly debit card system have an average savings of $13,000. On a recent visit to Germany, I was shocked to find that less than 35% of all the shops and restaurants accepted credit cards. What would we need to do to reverse this trend and get into a (plus) situation.
If we are serious about paying off our balances. We don’t have to literally cut up our credit cards, just stop using them routinely. We should go green for our everyday spending. Try carrying around a set amount of cash to use each week. We make better purchasing decisions when we actually have to hand over the green stuff plus there’s a preset spending limit. When we run out of money, we stop spending it’s that simple. When the only way to purchase is plastic, buying online for instance, then use your debit card. Your debit card can also be used as an emergency substitute for cash should you run out.
The best way to ensure that you enforce the cooling off period on new credit purchases is by taking the cards out of your wallet. You should store them in a place that’s not easily accessible and safe. Do not let others know where you have hidden them.
Having unused credit available from lenders with whom you’ve had a long relationship will help boost your credit score. Having too many will harm your credit score. As a rule, 3 credit cards is what works best and try to never spend more than 50% of the available credit on any of the cards. This will keep your score at it’s highest. You should also consider closing all your store cards, if you need to make a purchase then use your credit card and pay it off at the end of the month.
Start by reducing what you pay in interest. We can start by calling our current credit card companies and explaining that we intend to transfer our balance to another issuer unless our interest rate is lowered. Almost all credit card companies run promotional programs with low or 0% interest. They will be willing to put you on one of those rather than risk losing your business. All you need to do is ASK.
Finally we need to develop a strategy for paying off our existing credit card balances.
Gather all your credit card statements together and make a simple table listing the entire amount you owe, and the minimum payment and interest rate for each card. This will help us determine the order in which we should pay off our cards. We need to focus on the highest interest rate cards first and pay off as much as you can each month while making only the minimum payments on our other cards. When the first card is paid off, use the same strategy on the next-highest interest rate card and so on until you’re debt-free.
Are the number one cardinal sin of debt management. You get hit with hefty late fees and very high penalty rates that can go to 30%, plus of course your credit score will take a big hit.
We all have a responsibility to improve our financial literacy and develop the required skills and practices for effective financial management. There is a real need to get away from the “Someday things will get better in my life” or the “Someday I will be able to earn enough money to stop worrying about the bills. There is a lot more to life than that, but it has to be said and understood that the only person that can change your life is YOU. There is NO substitute for Action! With Action, you will overcome your fears and hesitations and accomplish everything you set out to do and more.