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Consider these options when consolidating debt

You’re starting to feel overwhelmed with debt and you’re not sure how to make even the minimum payments on all those credit cards. Never fear. Plenty of credit card companies are eager to come to your aid. They’ll offer balance transfers to help you consolidate high interest accounts. They’ll 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 you apply for that shiny 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 a relative offers to lend money, your credit score may actually improve because balances on existing debt will be paid off. Be sure, however, to put the agreement in writing and treat the loan like any other obligation. As Shakespeare put it, “Loan oft loses both itself and friend.” 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 in trouble again. In fact, studies have shown that most people who consolidate debt are struggling again within two years.

If you’d like help reviewing your debt consolidation options, give Carl Heinemann, your Chattanooga CPA, a call.