Credit Card Debt Consolidation Advocacy

As the economy continues to go through a recession more and more consumers are finding themselves entrenched in credit card debt.  You may have been laid off or perhaps you had to quit your job to take care of an ailing loved one.  You may have been in business for yourself and found that your business dried up as the economy soured.  Regardless of the reason, you are probably looking for a way to reduce or eliminate your debt.

Being in debt can be an incredibly stressful situation in life.  You may find yourself arguing with your spouse or children more often and not sleeping as well at night worried about where you and your family will be year, months, or even weeks from now.

Since you are reading about debt consolidation you are probably exploring your options.  Debt consolidation may be the right solution for you in order to regain control of your finances. However, before leaping into any debt restructuring program you should educate yourself on the implications and what to look for as you navigate your financial waters. 

There are many debt consolidation companies to choose from.  Educating yourself about debt consolidation and other options is the first step to resolving your debt and making a sound economic decision about your household finances.

What is a Debt Consolidation Loan

A debt consolidation loan is a loan that is generally secured by real property, such as your home. The loan is used to consolidate your outstanding debt. The outstanding debt may come from a variety of sources, such as auto loans, student loans, and credit cards.  In today's economy many people have found themselves burdened by credit card debt with high minimum monthly payments and very high interest rates.

If you take out a home equity line of credit in order to consolidate your loans, be very aware of the fact that you are putting your home up as collateral.  This means that if you default on the loan, the bank holding the equity line, also known as a second mortgage, can foreclose on your home in order to collect the balance of the debt.

Because you are putting your home up as collateral it is vitally important that you make sure that you are able to make the payments on the debt consolidation loan before you commit to the monthly payments.

Debt Consolidation Companies

You have probably seen advertisements for debt consolidation companies on television, you have probably seen them on the radio and you have more than likely seen them as you browse the internet.  As with any type of business, there are companies that can really help you and those that can make your situation worse.

First and foremost, shop around.  Make sure you compare fees and monthly costs as well as interest rates. Ask the company for a full disclosure of all terms as well as a total cost in terms of fees and interest over the life of the loan. If the debt consolidation company is not willing to provide this information in a clear format you should take it as a warning.

You may find that some companies offer 'no fee' consolidation loans.  You should realize that the reason companies are in the debt consolidation business is to make money. If they are offering 'no fee' debt consolidation loans, they are more than likely rolling any initial fees into the total cost of the loan, which means you will probably pay fees as part of your monthly payment. 

There are other companies who will make consolidation loans against your home. This is not necessarily a bad practice. You should watch out for companies who continually try to give you more money. After, all the point of consolidating your debts is to get out of debt, not get into more debt.

Be sure that before signing a contract or loan papers that you check with the Better Business Bureau and the Chamber of Commerce that is nearest to the company's headquarters. Any negative information received from either of these organizations about the debt consolidation company or lender should serve as a red flag.

Why Your Payments are Lower with a Consolidation Loan

You have seen the ads that tell that debt consolidation loans will lower your monthly debt payments.  It is true that in many cases if you consolidate your loans you monthly payments will be reduced. However, you need to look at why they are lower. If you have $20,000.00 in credit card debt and you are currently paying enough per month to have them paid off in two years and you look at a debt consolidation loan that will reduce your payments by $300.00 a month, you need to ask why.  More than likely it is because the term of the repayment on the consolidation is longer than your current pay-off plan, even if the interest rate is slightly lower. If the interest rates on your credit cards are very high and you can get a debt consolidation loan at a significantly lower rate, you may be able to reduce your payments enough without significantly increasing the term of your loan.  The bottom line on debt consolidation loans is to make sure you have a full understanding of the terms and conditions including interest rates, fees, and the total cost.  Read through our glossary if you are unfamiliar or unsure about terms and definitions used by credit card lenders and debt consolidation lenders.

Creating a New Budget

Above we covered what debt consolidation means.  Perhaps it is more important for you to understand how you got into debt in the first place.  There are hundreds of reasons why people have debt that is out of control.  Regardless of the reason you got in debt, in order to ensure that you don't get back into debt after consolidatiing you will need a new budget. Make sure you go through your monthly checking account statements and account for every expense. When creating a new budget people most often look over small expenses that can add up - items such as haircuts and car washes. Individually these small monthly expenses may not seem like much, but they can add up to literally hundreds or even thousands of dollars a month.

Changing Your Spending Habits

After you have successfully created a new budget, you have to change your spending habits in order to stick with it.  This is perhaps the hardest part for any person who is attempting a financial makeover. It is relatively easy to plan and initially implement a debt solution program for yourself. However, changing your behavior on an ongoing basis can be very difficult. You will have tempations every day. Perhaps you are used to buying on impulse or eating out constantly. Both of these behaviors will probably need to change in order for you to stick to your new budget and your overall debt reduction or debt elimination program. 

As is true when you are trying to change any behavior, support is often the best medicine.  If you know other people who are in a similiar situation with debt they may be a good source to turn to for mutual support. Perhaps you have a close friend or relative who is really good with financial management, they may be a great source to turn to for advice and ideas on how to save money.  It is also a good idea to continually learn about debt and debt management.  Read through our articles on debt management options, read through our glossary to learn new terms and definitions or use our debt management calculators to keep a running knowledge of how long it will take you to pay off your debt.