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Debt consolidation

Dear Dr. Don,
We have nine credit cards. Now that I am disabled from an accident we want to pay them off, but we have to somehow get them together and pay a set amount each month. How do we do this? Should we call individual companies, or is there some agency that can help us?
Thank you,
Bill Bevy

Dear Bill,
When you consolidate your debts, you're looking to reduce the interest rate or extend the loan term. Since credit card debts don't have defined loan end dates, revolving credit can stay with you for what seems like forever if you just make the minimum payments. What you really need is a lower interest rate credit card.

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Think about it. Let's say that you have $10,000 in credit card debt spread across the nine cards. If all the cards require a 2½ percent minimum payment, then consolidating the cards into one card isn't reducing your minimum payment. (Most credit cards have a required minimum payment somewhere between 2 and 3 percent of the outstanding balance.)

Using a home equity loan or a home equity line of credit (HELOC) could lower the interest rate, especially if you can use the mortgage interest deduction on your taxes, but you put your home at risk if you are unable to keep up with the payments. The home equity loan can also reduce your payments because the required monthly payment will be less than 2 percent of the loan amount.

If your credit history is in good shape, you may be able to consolidate the debt with balance transfers to a new credit card. Get a copy of your FICO Credit Score and Experian credit report from Bankrate's Shop & Save Channel to see where you stand. A low introductory rate will also have more of your monthly payment going toward paying down the loan balance vs. paying interest.

Consumer credit counseling can consolidate your debts and work out a repayment plan. The counselors may be able to also reduce the interest rate on your debt. Taking this step will damage your credit history because your credit report will show that your accounts were not repaid according to the terms of the credit agreements. Don't take this step lightly, but if you can't keep up with your bills this is an alternative to bankruptcy.

The FTC has information that will help you choose a credit counselor, and you can learn more about credit counseling on the National Foundation for Credit Counseling Web site.

 

 
-- Posted: March 26, 2002
     

 

 
 
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