Dear Debt Adviser, I have $30,000 in credit card debt that I want to pay off. I have had trouble juggling what is paid when, so I missed some payments. This has affected my credit score. I can make the payments, but the interest rates are high. I want to consolidate into one payment, so I know when it is due and can put more down each time. Right now I can't seem to keep track of them all. I don't want to use a mortgage or home equity line. I just want the cheapest rate so I can get them paid off. Do you have any suggestions? Thanks! -- Pat
Dear Pat, I'll bet you feel like you are juggling porcupines, not bills. Every time you mishandle one, it sticks you good! But not to worry, we'll corral those spiky critters. You're on the right track with your thoughts so far. But to really be successful you'll need to make a change to your spending plan and avoid using credit for purchases. Any new charges on a card with a balance incur interest charges from the minute you slide your card at checkout. More expensive charges make it harder to ever catch up, so I want you to make a commitment to yourself not to use your cards for new purchases until you have a zero balance and then only when you can pay the bill in full when it comes. Put them in water and place them in your freezer if you must.
For the organizationally challenged like yourself, it can be helpful to consolidate many credit card accounts into one payment. This can work, as long as it is done in a manner that ultimately helps and doesn't end up making the situation worse.
I agree with your idea to avoid turning your unsecured credit card debt to secured debt with a home loan. Attempting to lower your interest rates -- and the overall amount you'll spend to satisfy the debt -- is also a great idea. Where debt consolidation can sometimes go wrong is when folks get too comfortable with the lower interest rates and payments and begin to use their cards to repeat the debt cycle again. So remember, no charging until you are credit card debt free!
Now we'll take a look at your consolidation options:
Personal loan. You could try a personal loan if your credit score still has a pulse. If your income is sufficient, you may qualify for a lower interest rate loan with an affordable monthly payment. Be sure the loan allows for early payoff since it appears you want to pay off your debt quickly. I recommend you structure the loan with a monthly payment that is easily affordable and not a budget stretcher. You can always make additional payments, but you don't want to be in a situation where you could default on the loan if you had a hiccup in your income or an unexpected expense.
Balance transfer. Keep an eye out for low or no interest balance transfer opportunities. However, be wary of fees and getting too close to the credit card's limit.
Debt management plan. Nonprofit credit counseling agencies can also be an option. The agency would work with you and your creditors to create a repayment plan. Then you would make one payment to the agency, which would disperse payment to all your credit card issuers. You should receive better interest rates, and the plan would include total repayment within five years. You would also have the option to pay more than the agreed-upon monthly amount to pay off the debt faster. One caveat of debt management plans that I find positive (some may view it as a negative) is that the accounts placed on the plan are closed, and you are not able to use them to add to the balances. You can often leave a small balance account out of the plan if you need a credit card, say for business purposes. You can find a reputable, nonprofit credit counseling agency by visiting the National Foundation for Credit Counseling at nfcc.org or the Association of Independent Consumer Credit Counseling Agencies at aiccca.org.