Broke-Ass Financial Coaching: Pros and Cons of Debt Consolidation

While being young, broke and beautiful is all well and good, some people’s finances are more jacked than others.  That’s why we’ve invited Betsy Crouch (aka Coach $izzle) to come onboard and dole out some much needed advice.  She is a professional financial coach after all.  If you’ve got a question you’d like answered please email her at coachsizzle@brokeassstuart.com.  Maybe your question will be the next one answered.

I fucking LOVED these as a kid! I'd end up with like 4 fingers in different spots so I could go back if I made the wrong decision.

Choose your own adventure: to save thousands in credit card interest, read on'

The Question:

What are the pros and cons of debt consolidation?  – JJ

Answering a broad question about managing debt is like trying to summarize all the possible scenarios in a 'œChoose Your Own Adventure.'  To start off on the right foot, let’s get real.  It isn’t in credit card companies’ interest for you to be educated and empowered.  It is not an accident that dealing with credit and debt is confusing.   Here are some tools and tips to help you navigate.

Let’s stick with an example where you are able to pay your bills, albeit things are VERY tight.  Say you have debt on two credit cards, each with a $5,000 limit, that are almost maxed out and you are paying 27% interest on one and 29% interest on the other. Put your balances and interest rates into this “bankrate” calculator and look at how different monthly payments and interest rates effect the total interest you pay as well as the length of time it will take to pay it off.  In the example above, it would take almost 19 years to pay off the cards with minimum payments, dang!  Also the credit card companies would have made $13,617 in interest during that time from you!

Consolidation vs. Consolidators
Debt consolidation could consist of using a service or it could consist of you figuring out a way to get some kind of loan or sum of money to pay down several debts.
'œDebt consolidators are often a very bad deal.' '“ Suze Orman, 'œSuze Orman’s 2009 Action Plan'

Consolidators are companies who offer services of negotiating with your credit card companies to lower your interest rates and/or your monthly payment.  The idea of one payment per month and lower interest is appealing.  Also, most consolidators require you cancel your credit card accounts so that you are not using them and increasing your debt, which for some people can be extremely positive.  Some companies allow customers to keep one credit card open for emergencies.  Beware, in some cases people pay more interest over the course of time because although they may get a lower interest rate, the consolidator may push for a lower payment.  Unfortunately some consolidators have been known to submit late payments or miss payments on behalf of their clients, which damages credit scores.  See, 'œYour 3 worst debt consolidation moves.'

The National Foundation for Credit Counseling, 'œis a smarter choice,' says Suze Orman.  The National Foundation for Credit Counseling is a Network of credit counselors.  You can find one that will charge a low fee to help you manage your debt, and some will negotiate with your credit card companies.  Before calling a company in the network, read about them on the Better Business Bureau’s site.

What if you want to take the bull by the horns and do it yourself?
1.    Conventional wisdom suggests to call your credit card companies and ask for a lower rate. I have had dozens of clients successfully negotiate lower rates.  Right now this is not working as well as it used to.
2.    Do you have any available credit on any of your cards?  See what the transfer rate is on it and look into moving balances around.  Be aware of the charges associated with a balance transfer by asking.
3.    Get a personal loan, from a personal contact, from a stranger on www.prosper.com, or from a bank.
4.    If you have good credit see if you can qualify for a 0% balance transfer card.  There is no shame in playing the 0% game, if you can qualify.
5.    If you have good credit you may be able to qualify for a credit limit increase on one of your cards.  Ideally this would be a card with your lowest interest rate, see #1, then see #2.
6.    If none of these work, see #1, and ask what they can work out with you if you close the account.  You will have greater negotiating power with interest rates if the accounts are in good standing.  If you have defaulted on the accounts, search for a template for a hardship letter to send to your credit card company, to negotiate a settlement.

If you get the two “example above” cards down to 10% each versus 27% and 29%, and you ONLY make the minimum payments, you would save $11,054 in interest!!

I am rooting for you!

Post results here as a comment.  Email your questions to coachsizzle@brokeassstuart.com, and your question may get answered next week!