Dear Debt Adviser,
I have around $17,000 in credit card debt and an unsecured personal loan. Two of the cards have high interest, 29%, while the other two cards are at 13%. The interest on the loan is 17%. My available credit on the lower-APR cards isn't high enough to consolidate onto one card. I am considering going to a debt consolidation company to help reduce my monthly payments, which are increasingly hard to pay. I'd like a second opinion. What would you suggest?
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Debt consolidation isn't right for everyone. That's not to say it isn't for you, but before I can give you an opinion, I need to ask you a couple of questions. First, have you stopped using your credit cards? If you are still using credit, it will be much harder to get ahead of your debt. Second, are you still spending more than you earn? If you answered yes to either of these questions, you need to begin there. If you have not changed the spending behaviors or moved beyond the circumstances (such as a job layoff, divorce or extended illness) that caused you to take on such a large debt load at such high interest rates, consolidation will only prolong the inevitable. It won't solve your financial problems.
I want you to establish a workable spending plan that fits your needs and income. The plan should include deposits toward savings, and it should balance your income and expenses with no income extension using credit. With your spending plan in place, you will have a much better idea of how much money you have available to pay off your debt. That may affect your decision on the best way to consolidate. You may find that even with no debt, you can't make ends meet based on the income you have. In a case like this, there is no debt consolidation plan that will help.
Because you don't mention the balance of your personal loan, I am going to concentrate on the credit card debt. With $17,000 in balances at the interest rates you state, you are likely paying at least $470 each month in minimum payments on your four accounts. If you continued to make payments of $470 per month without adding to the balances, you could pay off the debt in about five years even with the high interest rates. However, if you could get the interest rates lowered to 6%, you could pay $330 per month and pay off the accounts in the same time frame.
If you have the room in your budget, then a consolidation plan may be your ticket. I suggest you consult with a certified credit counselor at a nonprofit credit counseling agency and determine if a debt management plan would be a viable option for you to consolidate your debt. Your counselor will review your spending plan with you and let you know how much you would need monthly to pay off your creditors in five years or less. You can find a reputable agency by visiting AICCCA.org or DebtAdvice.org.
You could also consult with an attorney (not a debt settlement company) about settling your debts. Settling your debt for less than the full balance will likely cause serious damage to your credit if it is still in good shape. But you may be willing to take the credit hit to get your debt woes behind you. If your credit is severely damaged already, the negative effect on your credit may be small.
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