Consolidating Isn’t Always Easy
November 20, 2015As I was whining about not having a topic to write about, I got this email in my inbox:
I’ve got a co-worker who wanted to consolidate his credit card debt into one manageable loan with a lower interest rate.When he started looking though, he continued to find either consolidation loans with higher interest rates than his credit cards or he’d find what he calls “scam artists” that claim to try to find consolidation loans that he would be eligible for but then would say that he wasn’t eligible for them or they were for a “3rd party investor loan.” (Don’t really know what he meant by that.) I said I’d help him find reputable companies and I did. BUT that’s hard to do with all of the information – good and bad – on the Internet.
Boom! That’s a real life blog topic….
I have worked with people in similar circumstances. They want to consolidate credit cards that have interest rates of 19% – 29% and with each payment, very little goes toward paying principal and most of it goes to interest. As the balances mount on the credit cards, more often than not, the person’s credit score will go down or payments will get skipped, which will make getting approved for a new card with a low interest rate a bit problematic. The very problem they are trying to solve is making the solution tougher to implement.
To make matters worse, there is a whole lot of conflicting information on the Internet. I searched “debt consolidation” and “refinance credit card debt” on Google and found 12,000,000 results between the two search terms. On page one of the searches, I found a mixed bag of reputable companies and organizations along with highly suspect offerings from companies with less than stellar reputations.
For a consumer with credit card debt, there is a lot of confusion out there. Who can they trust? What can they do? There are a lot of ways to solve this issue and I’ll walk through a few of them here. (There are many more, but the ones I’ll discuss are quite simple.)
Do it yourself. Make a list of every debt you owe. Pick the debt with the highest interest rate and pay it down aggressively while paying only the minimum on all other cards. This eliminates the need to open new accounts and get another credit inquiry (or more) and removes the possibility that you’d get a rejection from a potential credit provider.
The downside: this is hard – really hard if the balances are high. It takes perseverance, time and tenacity. Not everyone can make this work.
Refinancing through a home equity loan or a 401(k) loan. This is not my first thought, and it’s clearly one that should never be a “go to” strategy, but this is the ideal solution for some people. When getting approved for any other form of credit is probably unlikely (lots of missed payments or current delinquencies) and interest rates are in double digits, this might be a way to consolidate other debts, reduce payments and make life more manageable. The negative is that if you use this tactic and don’t address the underlying spending issue, you could have an equal credit card balance shortly after using this in addition to also having your home and/or 401(k) at risk because of the earlier loan.
Balance transfers. If you want to try to find a 0% interest rate card or a low interest balance transfer card, you can use the search features on free financial management sites like Mint.com, CreditKarma.com and CreditSesame.com. Each site will have offers based on your personal financial life. Some will even give you the “odds” of acceptance.
Peer-to-peer lending. There are great peer-to-peer lending sites that can take banks out of the equation and provide opportunities for loan consolidation. Check out sites like Prosper.com, Lendingclub.com, SoFi.com or others to see if you’re a candidate for refinancing with a non-bank lender. Since there is not a network of buildings to manage, the interest rates on these loans can often be lower than your local bank or credit union. (Although, if you have a good relationship with your bank/credit union, they are always a good place to check as well.)
If you have high credit card balances, be careful when searching for ways to solve this problem because there are frauds, scams and charlatans out there who prey on those who are vulnerable. The good news is that there are numerous ways you can consider reducing, eliminating and consolidating your debt before you go down the path of credit counseling, debt resolution or bankruptcy. Try some of these simple solutions and if you have questions about them, feel free to leave a comment below.