Research suggests that the Americans have started to use their credit cards again and in a big way. In the third quarter of 2011, credit card debt jumped 155% as compared to the same period a year ago. While the charge-offs and combined debt rose to $16.82 billion in Q3 of 2011, the Federal Reserve’s credit report illustrated a -2% drop in revolving outstanding credit.
The Fed says that there’s a spurring increase in the non-revolving debt in the form of student loans and auto loans and that it increased by $7.5 billion. While it is common for the debtors to end the year by resolving their debt issues through debt consolidation and debt reduction services, but the speed at which the Americans are garnering new debt in 2011 has been unprecedented. With the holiday season round the corner, the consumers plan to spend like never before.
Your consolidation options
If you’re using those nasty little plastic debt generators, you really have to be smart about the usage. With credit card rates ranging from 9%-25%, carrying balance on them may cost you dearly in the long run and may also have an adverse impact on your personal finances, which are already stretched tight. If you’ve incurred huge balances on multiple credit cards, debt consolidation can give you an edge in winning the battle against debilitating debt.
Is this the ultimate panacea to your debt problems?
Debt consolidation may seem to be a quick fix to your credit problems but you should be watchful about what looks like a quick fix! Getting a symptomatic relief is not enough when it comes to curing your credit woes. Debt consolidation is like ‘fighting-fire-with-fire’ and this can take several forms.
Vital statistics emphasize a major issue with consolidating your debts. In the first place, it feeds up on the tendencies that brought you into the initial debt problem and by taking on another creditor; you’re just adding fuel to the fire. Nevertheless if you’re almost at the end of the credit rope and you swear you’ll be more disciplined this time, you can make debt consolidation work for you despite the risks.
Playing with numbers through a 0% balance transfer card
Discipline and prudence are required when you choose to consolidate your debts into a balance transfer card. The credit card companies offer these teaser rates as baits to card holders so that they may switch vendors. Even if you qualify for a balance transfer card with a single-digit interest rate, remember that this is not going to last forever.
Make sure you know when the introductory period is going to end and how the rate may jump when it does. Try to transfer your high interest balance to this card within the mentioned introductory period so that you can reap the benefit of the low rates. Manage these payments meticulously as opening a new credit card account while you’re already defaulting on the previous one can hurt your credit score.
Tap your home equity if you’re cash-strapped but house-rich
Taking out home equity loans are publicized as an easy and quick way to get out of debt. By leveraging the value of your home, you can get cash to repay your unsecured debts and also qualify for tax breaks. But borrowing money against your home can backfire as your home is pledged as collateral to the loan.
You could risk losing your home ownership rights if you default on the loan. Approach the banks and they will tell you how much amount to borrow in order to be able to wipe off your credit card obligations. Though most people borrow the entire amount accumulated, you should avoid doing this. In a nutshell, borrowing against your home is a wise move only when you can afford to make timely payments.
Taking out a debt consolidation loan can be the most convenient way out
If the tough credit card calculations have scared you into looking for some other options, there’s always a debt consolidation loan to help you out. Instead of paying 10 different creditors, you can get out of the debt cycle by making a single outgoing payment in a month. But the ease associated with a debt consolidation loan will not always translate into big savings.
When you sign on the dotted line, make sure that the costs of the new loan is considerably lower than what you were paying on your 10 credit cards. Extending your repayment term through this loan may even mean interest rate accumulation over the term of the loan. Shop around among banks and credit unions in order to get attractive loan rates.
A small downside of the debt consolidation option and a reduced payment plan is the initial mark against you on your credit report. As credit report is tricky, you shouldn’t get caught in a jam by ignoring the fine print. Simultaneously manage your personal finances so that you can make the payments towards the debt consolidation loan on time and make the entire process successful.