Worst Debt Consolidation Measures
If you're
up to your eyeballs, the fantasy of debt consolidation can suck
you right in. Watch out for the slippery side of consolidation loans,
balance transfers and other 'easy fixes.'
The phrase
"debt consolidation" has always had a magical ring to
many people.
As if
somehow, someone would have the power to mush my debt into one neat
little package, which by some incredible financial alchemy would
also then shrink the debt itself -- and I'd only owe a hundred bucks
or so.
I know
I'm not the only idiot who's had this fantasy, because an entire
industry has sprung up to support it: The Debt Consolidation Industry
and Covert Sting Operation. Every day, I get at least one piece
of regular mail offering me low-interest balance-transfer deals
for credit-card debt, or arm-twisting e-mail from unknown credit
organizations that scream things like:
"DEBT RELIEF IS JUST A CLICK AWAY!"
"CUT YOUR MINIMUM MONTHLY PAYMENTS BY 50% OR MORE!"
"SLASH YOUR INTEREST RATES DOWN TO ZERO!"
These
promises are incredibly alluring to anyone who is caught in the
quicksand of having too much consumer debt, and who will believe
anything, do anything -- click her ruby slippers (bought on sale
for just $400!) three times -- to make it go away. But before you
start skipping down some financial yellow brick road to see the
Wizard of Debt Consolidation, remember this: Watch out for those
flying monkeys.
Three
bad debt-consolidation moves
1)
The Hard-Money Loan
"The biggest myth about debt-consolidation loans is that they're
easy to get," says Scott Kays, president of Kays Financial
Advisory Corp. and author of "Achieving Your Financial Potential."
If you really need a loan, it's probably because you've already
missed a few payments and your credit history has more dings in
it than a '74 Ford Pinto.
And that's
the problem. Kays says that if you are a credit risk, the consolidator
may entice you with promises of an easy-does-it loan, and end up
charging you higher interest rates than you're paying now -- as
high as 21% or 22%. "Your monthly payment may be lower"
with one of these loans, "but you'll end up paying more,"
says Kays.
2)
Debt Consolidators Who Promise to Take Care of Everything
This is the fairy godmother fantasy. This Nice Big Debt Consolidation
company comes along and swears they'll make your life soooo much
easier. They'll negotiate lower interest rates, reduce your monthly
payments -- and all you have to do is make "one EZ payment."
In reality,
many debt consolidators build in a fee as part of the monthly payment
you make to them. It's usually about 10% of the payment (i.e. about
$40 on a $400 monthly payment). They pass along your payments to
the creditor -- some debit directly from your checking account --
and get back a 10% to 15% percent slice that the relieved creditor
is only too happy to rebate to the consolidator.
Is it
worth paying someone else to do what you can do on your own, i.e.
negotiate lower interest rates and stretch out your repayment schedule
and pay off the highest-interest debts first?
To desperate
ears, this might sound like an ideal solution, especially when you
talk to these people and they scare the bejeezus out of you. I interviewed
two, Cambridge Credit and Counseling Services and Integrated Credit
Solutions. Each offered similar services, and I don't recommend
either of them. The senior credit counselor I spoke to at Integrated
told me, in grave tones, that it would take me 379 months -- or
32 years -- to pay off my debt. With their services, however, they
would "save me 27 years," and I could pay off my debt
in just 53 months, or about 4 1/2 years.
That’s
funny, because when I plugged my debt into the MSN Money Debt Consolidator
-- a less biased source, since they ain't getting no fee from me
-- they said I could pay off my debt in 41 months, providing I make
slightly higher minimum payments to each card: a total of just $60
extra per card.
Here's
another risk with consolidators you should know about: they have
been known, in some cases, to make late payments or even miss payments,
thus worsening your plight (and your credit record).
After
I got off the phone with Integrated, I had to ask myself: Is it
worth paying someone else to do what you can do on your own? That
is, negotiate lower interest rates and stretch out your repayment
schedule and pay off the highest-interest debts first? I don't think
so.
3)
The Balance Transfer Trap
Low-interest balance-transfer cards are a dime a dozen these days,
but remember that those rates only last a few months -- and then
you have to switch cards again. The danger is that at some point
all this activity begins to show up on your credit report, and you
start to look like a bad risk. Then if you get turned down, "you
could be left holding the high-interest card you were hoping to
dump," says Kays.
If you
think you can swing from the balance-transfer vines for a few months,
just make sure you formally close all your accounts yourself, and
then notify the credit-card company to mark the account "closed
at customer's request." "Otherwise, on your credit report,
it will look like the creditor closed your account," says David
Mooney, PR director of Equifax, one of the biggest credit reporting
agencies. Thus making you look like an even worse risk, even when
you're doing your best not to be.
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