Credit Card Debt Consolidation - Proceed With Caution

Credit card debt is a burden that weighs heavily on millions of people. Although the situation may feel desperate sometimes, it is important to stay focused on your long-term goals. You must not let raw emotion carry the day; your future is at stake. Many strategies and services are available to help people struggling with credit card debt, and it is important to use logic and reason, rather than emotion, when deciding among them. Choosing a strategy that does not suit your particular situation could lead to a less than optimum outcome. This article discusses some of the details of debt consolidation that many people miss and other options that may be of use.

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First, let me clarify some terms. This article does not deal with debt consolidation loans, where a homeowner takes out a loan against the equity in his or her house in order to pay off credit card debt. This transfers the unsecured debt from credit cards to secured debt, which is the home. If you do not have equity in your home, or if you have poor credit, you probably will not qualify for one of these loans.

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The topic here is a different sort of credit card debt consolidation, often called debt settlement. In this scenario, a debtor employs the services of a business that has experience dealing with credit card companies. The debt consolidator will negotiate lower interest rates, sometimes eliminating them entirely. They also may be able to negotiate a lower payoff amount. A lower interest rate combined with a reduced payoff amount results in far less time and money wasted paying off credit card debt. Additionally, you will only have to make one monthly payment to the debt consolidator, who will then disburse funds to your creditors. Sounds wonderful, doesn't it? If that were all there was to the story, it would indeed be wonderful. However, there is much more to credit card debt consolidation than meets the eye.

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Why Not to Consolidate

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Debt consolidation or settlement, whichever you prefer, has a negative effect on the credit rating of most consumers. This is because credit scores are based largely on the debt-to-available-credit ratio. If you have $9000 in debt and only $10,000 of total credit, your debt-to-available-credit ratio is nine to one, meaning your debt is nine times as big as your usable credit. For a debt consolidator to work its magic, you must agree to have your credit accounts closed. Therefore, though you may end up with only $7000 in debt, you would have zero dollars in total credit, giving you a debt-to-available-credit ratio of infinity. That is really bad.

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Another reason to resist the urge to consolidate your credit card debt is that you can do some negotiating with credit card companies on your own. You should not attempt to settle your debt directly with them, however. Again, they would require that you close your account, but they will not deal with you as kindly as they would with a professional service.

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You can certainly negotiate a lower interest rate while keeping your account open. Credit card companies will work with you on the rate as well as your credit limit as long as you keep your account in good standing. Call the number on the back of each of your credit cards and simply ask them to lower your interest rate. Call again every four to six months. If they say, "No," then you are in the same position you were in yesterday; but they may well say, "Yes, we would be happy to accommodate your request."

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When to Take the Debt Consolidation Plunge

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True financial hardship is the only situation that should give you reason to use a debt consolidation service. True financial hardship comprises injury, illness, divorce, termination of employment, or anything that causes you to have great difficulty making ends meet. Before you choose to consolidate, you should try every legal and ethical way to get back on track with your credit card debt. Get a second job, sell any nonessential household items, shop for bargains, or whatever means you can imagine. If, after all of that effort, you cannot make your monthly payments, consider debt consolidation. It is far better to consolidate your debt than to declare bankruptcy or to have your creditors file a lawsuit against you.

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Hopefully, you will find a credit card debt payment plan that works for you and you will not need to call a debt consolidation service. If you are unable to avoid debt consolidation, do not feel guilty or ashamed. You are making the conscious effort to improve your life. Continue to build on that attitude. Things will get easier, but it is up to you to make that happen. Begin it today!