Student Resource: Credit Card Debt Consolidation

Merchant Warehouse |

January 31, 2012

Debt consolidation refers to withdrawing a single loan to pay off numerous others. Borrowers seek debt consolidation in order to secure a lower interest rate, fixed interest rate, or for the simple convenience of servicing only one loan. Debt consolidation involves a secure loan against an asset that serves as collateral, usually a house in the form of a mortgage. Collateral serves as an agreement between the borrower and lender, guaranteeing the forced sale of the asset to re-pay the loan. This allows the lender to lower the interest rate of the loan. Debt consolidation agencies will periodically purchase an outstanding debt at a discount. Borrowers should carefully weigh their options against bankruptcy. Consolidating debt will often hinder a borrower's ability to declare bankruptcy. Bankruptcy is the declaration of individual or organized insolvency, which absolves all responsibility to repay prior debt. Most financial advisers will recommend borrowers to consolidate credit card debt, and declare bankruptcy if larger loans are involved, such as a home or a car.

A credit score reveals individual credit payment patterns over a prolonged period of time. Creditors emphasize recent activity; however, some will consider delinquent debts up to ten years after failing to repay the loan. Delinquent payments and collections on outstanding debt can have a negative impact on an individual's credit score. Borrowers can find it difficult to rebuild their credit score once the damage has taken its toll. Borrowers will have the opportunity to rebuild their credit history over time with guidance and self-discipline. Most negative impacts on a credit score stem from delinquencies, bankruptcies, unpaid tax liens, and inquiries. Delinquencies remain on an individual's credit report for seven years, whereas bankruptcies may remain up to ten years. Unpaid tax liens remain on an individual's record for fifteen years. All inquiries remain on one's credit report for two years. A poor credit report can hinder an individual's ability to find a job, obtain a car loan, lease, or small business loan, and may even decrease one's income through garnished wages.

Debtors have several options to eliminate credit card debt, including debt consolidation, debt management, debt reduction, and investment plans to curtail future debt accounts. Debt consolidation can include three different roads, including a home equity loan, a low interest personal loan, or transferring all existing credit card debt onto a fixed low interest APR account. Debtors can also exercise management of outstanding debt by refraining from adding to current debt, attempting to lower interests rates, and learning personal budgeting methods to repay loans at a faster rate. Debt reduction strategies can also eliminate debt by keeping credit account balances low or non-existent. Some companies have debt consolidation, personal budgeting, and debt reduction services to help debtors re-establish their finances without faltering into the same recurrent destructive behaviors.

In conclusion, debt consolidation offers several benefits that can improve the financial well-being of individuals seeking to eliminate it. For instance, debt consolidation can improve interest rates on existing accounts. Consumers often complain about exorbitant interest rates that make it difficult to pay back over time. The overall account balance will increase along with the interest rates. Debt consolidation will enable the debtor to greatly reduce their outstanding debt by reducing the principle. Debtors will be able to easily manageable monthly payments, get out of debt quickly, and restore credit ratings. It will also teach debtors the importance of saving, rather than digging an inescapable hole of insurmountable debt.

Follow these links to learn more about debt consolidation, personal budgeting, and investment options:

 

  • Building a Better Credit Report: The Federal Trade Commission (FTC) offers extensive tips and suggestions for building a better credit report, including the explanations to individual rights under the Fair Credit Reporting Act, methods to improving overall credit report, tips on dealing with debt, cautions regarding debt-related scams, general information about identity theft, and resourceful lists for additional information.
  • Questions Others Are Asking About Credit Card Debt Consolidation: A list of frequently asked questions from concerned California residents about their accruing debt, and methods for consolidating it to re-build their credit scores.
  • Minimizing Credit Card Expenses/Maximizing Your Personal Wealth: The Federal Deposit Insurance Corporation (FDIC) offers key tips for managing credit card debt, especially for students who wish to minimize overall expenses, limit accumulating debt, and maximize personal wealth.
  • Debt Management Options: The Attorney General of Texas offers prudent advice for choosing debt management options, including credit counseling services, debt consolidation, and debt settlement/negotiation companies.
  • Your Federal Student Loans: Learn The Basics and Manage Your Debt (PDF): An extensive government-sponsored document offering guidance for students wishing to manage their student loan debt, including understanding financial aid options, learning how to apply for aid, knowing how much one will receive, and learning about the details behind the repayment process and other options.
  • Debt: You Can Break Free: A statistical fact sheet informing individuals about the alarming growth rate of debt, and tips and suggestions for saving in order to pay off the interest accrued from past loans, including student loan debts, credit card debt, and mortgages.
  • Borrower's Guide to Home Loans: A comprehensive guide to borrowing money on a home's equity, which will equip buyers with the understanding of the loan process, including finding a good loan, spotting the warning signs of a bad loan, using reverse mortgages, and more.
  • Paying Off Credit Cards: The National Credit Union Administration provides a general guideline with examples on credit card re-payment methods, including knowing your financial means and limits, paying more than the minimum, shopping and comparing with other credit card vendors, comparing APR rates between companies, limiting to only one to two credit cards, reading the fine print and disclosures, and consolidating multiple credit cards onto one single account with a low APR.
  • Credit Card Repayment Calculator: The Board of Governors of the Federal Reserve System provides an important tool for repaying credit card debt based on two conditions: the borrower makes no additional charges, and makes only the minimum payment each month for the life of the loan.
  • What is Predatory Lending? (PDF): A comprehensive pamphlet offering tips for borrowers looking to avoid predatory lending.
  • A Free Online Money Management Tool: A free online money management and budgeting software tool, helps people budget their income and expenses by tracking, saving, growing, and reducing debt over time. It offers advice from paying off debt, retirement savings, frugal spending, and understanding credit and investment options.
  • Smart Money: A Financial Resource: Smart Money, a top-ranked financial resource, offers practical advice on several financial topics, including all kinds of debt, insurance, taxes, retirement, employment, and college preparation. It also offers tools on comparing credit card offers, retrieving advice on health care plans, discovering deals and discounts, and investment advice.
  • Kiplinger Magazine: An online publication that teaches the basics of money, including debt, insurance, familial finance, credit, education repayment, scams, estate education and planning, and more.
  • Forbes: Forbes provides financial investment options for those seeking advice after getting out of debt, including mutual bonds, IRA's, 401(K)s, stocks and bonds, and real estate planning.
  • Reducing Credit Card Debt: Some great information from a resource management specialist on reducing credit card debt.
  • Control Your Holiday Credit Card Debt: Some tips on ways to control spending and credit card debt around the holidays and ways to cut holiday costs.
  • Credit Counseling & Debt Management: A list of questions and answers on credit counseling and debt management.
  • Are Consolidation Loans Recommended: Answer to the question, Are consolidation loans recommended if you have multiple credit cards?
  • Dig Out of Debt: A great article that gives some tips and pointers on digging yourself out of debt.