Credit Card Debt >> Should you consolidate?

What can we say?  We are not big fans of credit cards. We have so many clients that come to us for debt consolidation loans when they get in too deep.  We can help them 95% of the time, but sometimes it's too late.  Sometimes the client has so much credit card debt, that we can't even qualify them for the debt consolidation loan that they need so badly.  Below, we will write some very important facts about credit cards, starting with a credit card debt consolidation loan.

Debt Consolidation

If you ever get over your head with credit card debt, you are certainly not alone.  At some point, it seems that everyone gets in a credit card jam.  If you find yourself unable to pay your credit card bills, you basically have three choices:

  Bad Idea #1:  You can file bankruptcy.  Bankruptcy should be your last resort for eliminating credit card debt if you are a homeowner.  A bankruptcy will seriously harm your credit and you will not be able to get a low mortgage rate (a Fannie Mae loan) for at least four years after the bankruptcy discharge date.  In addition, Federal Bankruptcy laws have recently become more strict.  It is not as easy to wipe out all of your debt as it once was.

  Bad Idea #2:  You can call one of those "non-profit credit counseling" services.  You call one of these places and then they call all of your credit card companies for you and negotiate a lower payment- one that you can afford.  You might have seven credit cards and the minimum payment on each is $100; they might get it lowered to $50 for each card.  Be warned however:  If you take this option, you will be listed as "in credit counseling" on your credit report.  As soon as you strike a deal with the credit card companies, they are going to punish you by reporting you as "in debt counseling."  It basically ruins your credit, so you might as well file bankruptcy.  You would have a great deal of trouble qualifying for any new loan if you are in credit counseling.  Also, please be wary of scam artists in this business.

  Good Idea:  If you are a homeowner, you can take out a debt consolidation loan.  That is, you can borrow against your home's equity and pay off all of your creditors.  Your credit does not get ruined- in fact, your credit score will go up because you just paid off a whole bunch of debt.  We had one client with a 640 FICO score.  After he paid off all of his debt with a debt consolidation loan, his score went up to 715, which is outstanding.

In addition, if you wrap all of that nasty credit card debt into your primary home loan, now it becomes tax deductible.  So instead of ruining your credit with bankruptcy or credit counseling, you improve your credit, lower your monthly liabilities considerably, and get a bigger tax refund at the end of the year.

Call us at (877) 551-8188, ext. 81 if you are a homeowner and would like to discuss your current debt consolidation needs.  Again, we can only help you if you currently own a home.

Important Facts About Credit Cards (that everyone should know)

1.  Credit card debt is listed on your credit report as "revolving" debt and this hurts your score.  This means that you can charge it up, pay it off and charge it back up again.  As you can imagine, if you have a lot of credit cards, it makes lenders very nervous and it also makes your score go down.  Why?  Because even if you have perfect credit and you pay all of your bills on time, you could go nuts and charge up all ten of those credit cards all at once.

Bottom line:  The ideal number of credit cards to have is three.  Maybe one Visa, one Discover, and one Mastercard.  This demonstrates that you are a responsible individual and you don't just apply for every credit card that comes along.  It also doesn't give you all that room to screw up.

2.  Never, ever take out a "cash advance" on your credit card.  All credit card companies will give you a PIN number so that you can withdraw cash from an ATM using your credit card.  This is bad on so many levels. 

First of all, there is always a "cash advance fee" and it's always between $25 and $50.  So if you take out $250 from an ATM machine and the fee is $50, you just paid 20% interest, up-front.  In addition, if you read your credit card's fine print, you will find that the interest rate on cash advances is always ridiculously high- oftentimes 26%.  So tack on that high interest rate to the "up front" interest you pay in the form of the cash advance fee, it is quickly apparent that credit card cash advances are foolish at best.

3.  Keep all credit card balances at 50% or lower.  This is about something called your debt-to-credit ratio.  Let us say that you have 3 credit cards and all three have a maximum credit limit of $1000.  Ideally, you would not owe more than $500 on each card at any given time.  This tells the credit bureau that you have a lot of credit available to you, but you don't need to use it.  You are responsible enough with your money that you just use credit cards as you need them.  Even if you pay all of your bills on time and have never paid late in your life, if all of your credit cards are maxed-out, your credit score is going to be affected quite badly.

4.  Shred all of your department store credit cards.  These are the worst of the worst when it comes to credit card interest rates.  They are always over 20% and- although this cannot be confirmed- it is rumored that these lower your credit score even moreso than regular credit cards, because the terms are usually so bad.

However, we know that oftentimes stores will offer you 10% off all of your purchases that day if you apply for a store credit card.  If you are going to Home Depot and you are going to spend $2000 for new appliances it would be foolish not to take the $200 discount just for applying, right?  Right!

There is nothing wrong with applying for many different cards- just do not keep them.  Take the discount that the store is offering for applying and when you get the credit card in the mail, immediately call to cancel.  Stick that thing in the shredder.  The only reason you would ever use a department store credit card is because your other cards are maxed out.  If you other cards are maxed out, buying new merchandise is probably a bad idea anyway.

5.  If you are going to be late on a credit card payment, call the credit card company.  If something happens and you are unable to pay your credit card bill one month, call the credit card company!  For some reason, many people avoid the telephone when they are in financial trouble- that is the worst thing you can do; it usually just makes your collectors more aggressive.  Most credit card companies are very appreciative of a phone call if you are going to be late on a payment.  In fact, if you call them and tell them that you had a problem this month, but you will send in the total past due amount within the next couple of weeks, they often will not report the "late" to the credit bureaus.  If you don't make payment and you don't call them to keep them in the loop, they are going to report you every time you are late.  Late payments on credit cards hurt your score very much.

Some helpful Credit Card Resources:

Credit Card Fraud information from Wikipedia

Avoiding Credit Card Problems from the University of Maryland

The Federal Trade Commission's (FTC) Credit Card Advice Page

Credit Card Advice from Colorado State University