Dr. Blog's Debt Advisor

Got questions about debt consolidation? Dr. Blog helps.


Sunday, July 31, 2005

Credit Counseling

Credit counseling is a valuable service for consumers who have trouble managing their finances. A distinctly different service from debt consolidation, credit counseling assists consumers with problem debt by educating them about the basics of money management. Americans really don’t get the education they need about how to manage bank accounts, balance checkbooks, or pay bills on time, and credit counseling can provide these services as well as others. By educating consumers, counselors hope to reduce the number of debtors who are forced to file for bankruptcy. Anyone whose financial situation is such that they would benefit from credit counseling may wish to seek it out in a hurry, however. A number of different factors are coming together in such a way that the counseling industry may soon be completely swamped with more clients than it can handle.

Those in the credit counseling industry say that this is a critical time, and the combination of new laws, fragile markets, and credit card industry overhaul could push a number of consumers towards bankruptcy and mandatory counseling. Anyone with problem debt who might benefit from counseling should consider doing so sooner, rather than later, as qualified credit counselors may be quite busy this fall.

Source: ezinearticles.com

Financial Savings

Being able to save money is, or should be, an important factor in deciding whether to take out a debt consolidation loan. Typically, people who are considering consolidation will have multiple debts which include one or more with high interest rates. This particularly happens when loans are taken out during a period when market interest rates are high. The borrower sees cheaper loans advertised when the market rates decline, but the rates of his loans are fixed at a high level; it is therefore an immediate temptation to switch to one cheaper rate loan and to make interest charges and monthly payments cheaper.

Another type of debt that will bear a high interest rate is credit card debt. It can be attractive to consolidate such debt with any other loans, so that they can be paid off in one monthly payment at a lower level than the current loans added together.

The lower monthly payments give the impression that you are making savings when opting for debt consolidation. However, that apparent saving may be due to a longer term of loan. You do need to make sure you are actually making a saving. You can do this by checking the total annual interest charges for your existing debts, and compare them with what they would be under a new consolidation loan. Only by reducing your interest charges will you be making a true financial saving.

When calculating any saving, be sure to take into account any charges made by the new lender, and any penalties you may suffer through paying off other loans early. Such costs can be critical in deciding whether there are any financial savings.

Source: ezinearticles.com

Reducing stress when you consolidate debt

Your level of stress can increase steadily if your finances are in poor order, and each month you find it more difficult to meet loan and credit card repayments on time. If you consolidate your debt you should be able to get the monthly repayment to a more affordable level, thus reducing the potential for stress as you struggle to make a lot of monthly repayments.

Debt consolidation in general

Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.

Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, which is most commonly a house. In this case a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset in order to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.

Sometimes, debt consolidation companies can discount the amount of the loan. When the debtor is in danger of bankruptcy, the debt consolidator will buy the loan at a discount. A prudent debtor can shop around for consolidators who will pass along some of the savings. Consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed carefully.

Debt consolidation is often advisable in theory when someone is paying credit card debt. Credit cards can carry a much larger interest rate than even an unsecured loan from a bank. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. In practice, many people are in credit card debt because they spend more than their income. If that habit continues, the consolidation will not benefit them much because they will simply increase their credit card balances again.

Reducing debt before it's too late

Reducing debt usually isn't a high priority for people until they have already gotten into trouble with overspending. Using a few basic guidelines, and debt calculations, can help you see when your debt load is getting into the danger zone.

First off, creditors use budgeting guidelines when reviewing and approving credit. If your debt exceeds the financial communities recommended guidelines, then you have a higher risk of credit applications being denied.

Getting, and keeping, your debt in line with recommended budgeting guidelines, is an important step in when reducing debt. Use the following recommended budgeting guidelines (the same ones used by Financial Institutions) to review the items in your budget:
  • Housing 35% - Mortgage or rent, taxes, repairs, improvements, insurance, and utilities
  • Transportation 20% - Monthly payments, gas, oil, repairs, insurance, parking & public transportation
  • Debt 15% - Credit cards, personal loans, student loans & other debt payments
  • All other expenses 20% - Food, insurance, prescriptions, doctor & dentist bills, clothing & personal
  • Investments & Savings 10% - Stocks, bonds, cash reserves, retirement, rental real estate, art, etc.

The affect on your credit report if you consolidate debt

The precise affect on your credit report or status when you consolidate debt will depend on your location. Your new consolidation loan will be recorded, but so long as you maintain your payments, on time, for the duration of the loan, then you should emerge at the other end with a decent credit standing. However, deciding not to consolidate debt may adversely affect your credit status if you subsequently default on any of your loans or credit cards.

The above are just some of the factors that should be taken into account in a decision to take out a consolidation loan, and it is wise to consider everything fully before deciding. If you decide to go ahead, then shop around for the best deal. That will help you for many years to come.