A Nilson Report from February 2010, revealed that 576.4 million credit cards were circulating in the United States as of December 2009. What’s more, 98% of all of the revolving debt in the U. S. Totals $864.4 billion as of January 2010. This is according to the U. S. Federal Reserve. The average household has more than $16,000 in credit card debt and the default rate, according to the Fitch Ratings, is 11.37%. Clearly, people are in dire straits and may want to think about bad debt consolidation to improve their financial situations.
What Is Debt Consolidation?
Quite simply, debt consolidation is the combining the balances of several credit cards into one lump sum of debt in a consolidated loan. The debt consolidation loan offers a lower interest rate than the high-interest credit cards that you will probably never pay off because of the high interest rates. Clearing your high-interest cards is the first thing you must do to begin taking control of your finances.
Consolidation Loans: What Are They?
The bank or low-interest credit card company agrees to loan you the money to pay off what is owed on your other cards. The loan is unsecured, which means that you do not have to put up collateral, such as your car, in order to get the loan. Each month you will pay a pre-determined, fixed payment on the loan. The benefit of a consolidation loan is that the payment is the same month after month. You can budget for the monthly payment much more easily than you could with a variable interest rate card.
Things To Beware
No doubt you have seen advertisements by companies who say that they will handle all of your financial problems and speak to the creditors on your behalf. What they often do not mention is that they will charge you a percentage of your payment. This charge is usually in the 10%-range. If your payment is $500 per month, the company would take $50. You could put that $50 towards your debt if you handle payments yourself.
Balance transfer offers arrive in the mail on a daily basis for some people. These offers agree to extend you credit for an extremely low interest rate in exchange for transferring all of the balances on your credit card to the new creditor. Before you sign up for one of these transfers, do a bit of research. Make sure you know how long the low interest rate lasts. Some only last for six months and then bump up to a significantly higher rate. Additionally, find out what happens should you be late on a payment. Late payments may negate your low interest rate even if the initial time period for the low rate has not expired.
Bad debt consolidation can be a good solution for someone who needs to get his or her financial life back on track. Be careful not to make financial decisions, especially desperate financial decisions, with your emotions. Many unscrupulous debt relief companies have taken advantage of people when emotions were running high. Take time to think your financial decisions through thoroughly.
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