Before consolidating debt, ask these 4 questions
You’re starting to feel overwhelmed with debt and you’re not sure how to make even the minimum payments on all those accounts. That’s when you realize that credit card companies are eager to come to your aid. They offer balance transfers to help you consolidate high interest accounts. They provide “one low monthly payment” to simplify your finances. With their assistance, you’ll be debt-free in no time. At least that’s what the advertisements say.
But before consolidating your debt on a new credit card, ask the following questions:
- What fees can I expect? You may be charged for transferring balances. The new company may assess a monthly or annual fee, regardless of whether or not you use the card for additional purchases. If you make even one late payment, that low interest rate may skyrocket and you’ll likely be charged a late fee. If you’re late more than once, both the late fee and interest rate may jump. All such terms will be laid out in your new credit card agreement. Read it before signing.
- Would a personal loan be a better option? In some cases, a credit union or bank may help you consolidate debt by offering a single loan with a fixed interest rate and term. If your credit is decent, this may be a better option than switching to a new card. Knowing that you’re required to make a fixed payment each month and that your debt will be paid off in, say, three to five years can help you from falling into the minimum payment rut.
- Should I ask family and friends for help? If someone offers to lend money, your credit score may actually improve because balances on existing debt will be paid off. However, be sure to put the agreement in writing and treat the loan like any other obligation. Borrow from friends and family at your own risk.
- Am I willing to modify my spending habits? This, perhaps, is the most important question you can ask. If you can’t find the discipline to spend less than you make, you’ll likely end up with debt troubles again.
If you’d like help reviewing your debt consolidation options, give us a call.