Debt Consolidation

Debt Consolidation and Your Credit Score

Thu, 28 Feb 2008 16:00:00 EST

Debt Consolidation and Your Credit Score Are you considering a debt consolidation loan, but are worried about the impact to your credit rating? Here are some ways that consolidating debt can help you improve your credit score.

Late payments can hurt your credit, so anything you can do to make regular payments will help you protect your credit score. If you have a significant amount of debt and are having trouble managing all of your payments, a debt consolidation loan may help you improve your credit score if you make your new loan payments consistently.

What is a debt consolidation loan?
A debt consolidation loan is a loan used to pay off other, potentially higher interest rate debts, like credit cards, auto loans or retail store credit. You pay off those debts with a debt consolidation loan and then make one monthly payment on the new loan.

How does it affect my credit?
Applying for a debt consolidation loan will most likely not impact your credit score significantly one way or the other. Since you are paying off several other debts with the new loan, credit rating agencies will note that your other accounts have been paid off. In fact, if you manage to make your debt consolidation loan payments consistently, your score may even improve over time.

Should I close my old accounts?
If you do use a debt consolidation loan to consolidate high-interest debt, it's a good idea to carefully consider how to deal with the accounts you pay off. You may be tempted to close your credit card accounts in order to remove temptation. However, closing accounts can actually have a negative impact on your credit score. This is because credit bureaus look at the amount of credit you're using compared with the total amount you have available. So closing zero balance accounts reduces your unused credit and may make it appear that you are overextended. In addition, credit bureaus look at the length of your credit history. (The longer you've been using credit responsibly, the better.) So if you do decide to close several accounts to remove temptation, consider closing the newest ones first.

Get on Top of Your Debt with a Consolidation Plan

Thu, 14 Jun 2007 10:00:09 EST

Get on Top of Your Debt with a Consolidation Plan Like any other financial goal, managing your debt starts with a plan.

Step 1: Figure out how much debt you are carrying.
List out all your current debts, not including housing or your mortgage. In addition to your credit cards, be sure to also list your car loan (the balance, not just the monthly payment) and any retail store credit (like furniture or appliances). For instance:

Credit card: $15,000
Retail store credit: $5,000
Car loan: $20,000
Total non-housing debt: $40,000

Next, add up the monthly payments you make on these accounts. For your credit cards, take the average of your last six months' payments.

Credit card: $750
Retail store credit: $500
Car loan: $350
Total monthly payments: $1,100

Now you'll have a more complete picture of your debt. In this example, you would need $40,000 to pay off your debt, and your current monthly payments are $1,100. When thinking about consolidating you'll want your monthly payments to be lower than $1,100. Or, if you are not struggling to make these payments, you could keep the same monthly payment, but with a lower interest rate. This saves you money in the long term because you'll pay off the debt faster.

Step 2: Find the best consolidation loan.
If you are a homeowner and have equity in your home, a home equity loan or line of credit, or a cash-out refinance could be a smart option. Let's say you have $80,000 in equity (you own that much of your home). Using the above example, if you took out a home equity loan or line of credit for $40,000 at 7.5 percent interest for five years you would pay $800 per month. Plus, the interest may be tax deductible, though you should always check with your tax advisor to be sure.

If you don't own a home, or do but don't have much equity built up yet, or if you just don't want to put your house on the line, a personal loan may be your best bet for debt consolidation. The interest rates on a personal loan tend to be higher than a home equity loan or a refinance, but usually lower than credit card interest. Since these loans are unsecured, they rely even more heavily on credit score, so make sure you do your homework and compare interest rates. Debt consolidation makes the most sense if the interest of the new loan is lower than what you are currently paying.

Step 3: Stop spending.
Obviously you still have to eat and clothe yourself and your family. Household expenses will continue. But take a long hard look at the non-essentials and put them off, or budget carefully for them. Debt consolidation doesn't help you if continue to run up more debt.

5 Steps to Getting Out of Debt

Thu, 14 Jun 2007 10:00:09 EST

5 Steps to Getting Out of Debt Debt doesn't have to be a burden forever. Use these steps to get yourself out of debt and on with your life.

Step 1: Get into a right relationship with money.
A heavy debt burden can feel like an accusation, and maybe you'd rather not deal with it. But if you're reading this you know ignoring your debt will not make it go away. Remember, you are in charge of your money, not the other way around.

Step 2: Carefully monitor what you spend.
Categorize your purchases into wants and needs. Be honest. Online banking can be a help here - you can download transactions you make from your bank account or credit cards. Or, take your paper statements and label each line item. Put what you normally spend on discretionary items - that $3.50 latte, those weekly trips to the mall - into paying off your debt.

Step 3: Put your credit cards away.
We are more aware of what we spend when we pay with cash. Use this as a way to curb your spending. Another strategy is to shop only with a list and take only as much cash as you've decided you can afford.

Step 4: Use your savings.
It sounds counterintuitive, but if you've got a rainy day fund stashed in a savings account or CD, you may want to use it to pay off your debt. Financially speaking, savings earning five percent may be better used to pay off credit cards charging you 18 percent. Once your debt is paid down, you can start saving again.

Step 5: Think about debt consolidation.
At nine percent and higher, credit cards are typically the most expensive form of debt. You may be able to transfer that debt to a lower-interest loan. If you are a homeowner, a cash-out refinance or home equity loan or line of credit can be smart options. For more see our article on debt consolidation.

Debt Consolidation 101

Thu, 14 Jun 2007 10:00:09 EST

Debt Consolidation 101 Not sure what debt consolidation is, or how it might work for you? Use this guide to walk through the basics.

What is it? Debt consolidation involves combining your various debts - credit cards, car loans, retail store credit from furniture or clothing stores -- into a single loan. Think of it as carrying your debt burden in one big suitcase instead of five or six small bags.

What are the benefits of debt consolidation? Combining your debt into one loan can lower the total interest you pay and spread out repayment over a longer time. This can lower your total monthly debt payment. Another benefit is the convenience of one payment, instead of managing multiple bills coming in at different times of the month.

There are several different loan types that can help you consolidate debt.

Loans for homeowners
If you own a home, often the cheapest debt consolidation method is a cash-out refinance or home equity loan or line of credit. These loans take advantage of the equity in your home (the portion of your home that you own) and turn that equity into cash that you can use to pay off debt. The repayment of that debt is combined into your mortgage - in the case of refinance - or consolidated into the home equity loan or line of credit. The interest rate for these types of loans is usually far less than credit cards or other consumer debt, and has the added benefit of being tax deductible. (Check with your tax advisor to be sure.) But keep in mind that the reason cash-out refinance and home equity loans usually have a lower interest rate than other forms of debt is because the loan is secured by your home. That means if you default on the loan, you could lose your home.

Personal loans
Personal loans are unsecured loans that can be used for debt consolidation. They're likely to have a higher interest rate than a loan secured by property, and an even higher rate if your credit is shaky. If this applies to you, you may want to consider finding someone to co-sign with you. The key to saving when consolidating your debt is to obtain a lower interest rate than you are currently paying, so be sure to compare the interest rate on a personal loan with the interest rates you are currently paying.

Debt consolidation is only one step
Keep in mind that debt consolidation loans can only help you if you change your spending habits and avoid running up more debt. Be sure that you are committed to paying off your debt and cutting your spending before you commit to a new loan. Otherwise you could end up in a worse situation than before.

Want to take the first step to consolidating your debt? Get matched with up to five lenders who can help you find the right loan for you. Start your loan request today!

Tips for Using Credit Cards

Wed, 28 Feb 2007 16:30:04 EST

Tips for Using Credit Cards A credit card can help you build credit and manage your money. Follow these steps and precautions to make sure you fully understand your credit-card plan.

A credit card can help you build credit and manage your money. Follow these steps and precautions to make sure you fully understand your credit-card plan.

1. Shop around for credit-card terms that are best for you.

2. Make sure you understand the terms of a credit-card plan before you accept the card. Review the disclosures of terms and fees that must appear on credit-card offers you receive in the mail.

3. Pay bills promptly to keep finance charges as low as possible.

4. Keep copies of sales slips and promptly compare charges when your bills arrive.

5. Protect your credit cards and account numbers to prevent unauthorized use. Draw a line through blank spaces above the total when you sign receipts. Rip up or retain carbons.

6. Keep a list of your credit-card numbers and the telephone numbers of each card issuer in a safe place in case your cards are lost or stolen.

Secured vs. unsecured cards
Secured and unsecured cards can be used to pay for goods and services. However, a secured card requires you to open and maintain a savings account as security for your line of credit; an unsecured card does not.

The required savings deposit for a secured card may range from a few hundred to several thousand dollars. Your credit line is a percentage of your deposit - typically 50 to 100 percent. Usually, a bank will pay interest on your deposit.

In addition, you also may have to pay application and processing fees, sometimes totaling hundreds of dollars. Before you apply, be sure to ask what the total fees are and whether they will be refunded if you're denied a card. Typically, a secured card requires an annual fee and has a higher interest rate than an unsecured card.

This information is adapted from "Choosing and Using Credit Cards" published by the Federal Trade Commission.