According to a recent survey by Bankrate, credit card debt in America equals the amount that most people have in emergency savings. Numerically this means only 55% of people have savings that exceed their credit card debt. According to the same survey, consumer credit has been falling in recent times, but still there are no positive trends when it comes to saving habits.
With the rise in credit card debt, more people are looking for ways to solve their financial problems. Debt relief can be achieved through several means, but in this article, you will learn why debt consolidation is the best way to remove your personal credit card liability. You will also learn how to apply for a consolidation program.
What is Debt Consolidation?
Debt consolidation is a practical way to eliminate your debt by combining all your liabilities and their sky rocketing interest rates into one debt with a low interest rate. Hence, you will only have to take out one consolidation loan to amortize your existing liabilities. In the end, you will have just one loan with a lower interest to service, and this speeds up your debt recovery.
Consolidation is the best option for people who are currently paying high interest rates. Moreover, most people are not money wise and they are unaware of the nuances of financial management, while others are hooked on their cards so much that paying bills on time now has become a big problem.
In addition, there are some people who incur a lot of credit card debt during their graduation. Young mothers especially attend grad school and only work part time to concentrate on their studies and raise their families. But by the time they get their degree, credit card debt piles up. Debt consolidation therefore is an effective solution in such situations.
Here is statistical example from Investopedia that explains how debt consolidation works:
Suppose at this time you are using 3 cards with a yearly interest charge of 28%. The limit on each card is $ 5,000, and you are making monthly payments of $250 at present to repay them. If you were to tackle one card at a time, that would amount to monthly payments of $750 for more about 2½ years. By the end of the whole thing, you would have paid approximately $5,400 in interest.
However, by converting them into a single consolidated loan at a lower interest rate of, let’s say, 12%, you would continue with the same monthly payments. But this time, you will clear the debt in 23 months, and pay only $1,820 in interest. This means that by using a debt consolidation loan, you will make savings of $7371 (with $3621 in interest) than if you were to clear your debt in another way.
When Should You Consolidate?
Before proceeding, it is important to note here that debt consolidation will generate the above mentioned result only if you cease using the 3 credit cards. That is why it is important to make an assessment of your spending habits before determining whether debt consolidation is a viable option for you.
Here is a list of spending habits to watch out for:
- Using credit cards to pay for bills and utilities
- Using credit cards to buy things that exceed your income
- Writing checks for amounts that exceed your balance and then hoping to cover them by making a deposit
- Opening new credit card accounts because existing ones have maxed out
- Being called by a collection agency
If these factors apply to you, debt consolidation will not work unless you change your attitude towards money management, budgeting, and saving.
How to Apply
Select a bank for the loan and consult with its financial adviser If you are an old client of this bank, you can get the loan at favorable rates. You will also have to submit documents to the lender like your letter of employment and letters from creditors or settlement agencies.
Finally, you can even line you your credit card debt with a secured debt like your mortgage. In this case, the bank will be willing to charge less interest because if even if you default, the bank can cease your secure assets and auction them to recover their loss.
Even though debt consolidation is the best way to eliminate your credit card debt, remember that it is your overall spending habits that will ultimately help you get out of your financial troubles. Credit counseling is available through several means, and you can even search the internet for the best programs available.
About the author
This article is composed by Elaine McPartland who is associated with “Consolidated Credit” as their community writer. She feels that to get rid of credit card debt you should consolidate debt immediately. You can add her at her google+ profile.