Issue #10 - What Is Debt Consolidation Really Going To Cost You?

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Debt Reduction Academy Newsletter
Vol. 2, Issue #10 - January 22, 2009
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William here, with another issue of the Debt Reduction Academy newsletter.

This week's article is:

===> Debt Consolidation: A Helpful Way To Lower Your Interest Rate and Payments or An Easy Way To Lose Your Home?

This week marked a historic day in the history of the United States - the inauguration of Barack Obama as president.

Whether you agree with his politics or not, you have to admit that the event was quite a spectacle, one that many people will tell their grandchildren about.

But once the shine wears off, President Obama has plenty of issues to address. The general feeling over the last few months seems to have been one of optimism, but I can't help but wonder how soon people will start to turn on him if he doesn't get things fixed quickly.

The economy is a big one, and I don't think it's going to be an overnight turnaround. Obama seems to have been preaching patience, that things won't change right away, but I wonder how many people truly heard that message.

The next few months will be an interesting time.

William

IN THIS ISSUE:

1) Sponsor advertisement:
2) Reader Q & A
3) Announcements
4) Main article: What Is Debt Consolidation Really Going To Cost You?
5) Newsletter archives

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1. SPONSOR ADVERTISEMENT

Would you like to live a greener, more environmentally friendly life and save money at the same time?

In spite of what you might think, both are possible.

Find out how you can do it on the How Can We Go Green website:

http://www.howcanwegogreen.com

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2. READER Q & A

This week's question:

Which is better - paying off one credit card fully (eg. paying off a $2000 balance) and closing the account or partially paying off another credit card (eg. paying off $2000 of a $4000 balance) with the intention of closing the account once it's fully paid? Which option would save me more money?

If saving money is the primary concern, you should put the money on whichever card has the highest interest rate. Whether it's the one that would be completely paid off or not, this is the option that's going to cost the least.

If you would rather get one paid off and then start tackling the other, pay off the one that you can pay the full balance on.

If you pay off the one that you can clear the entire balance, you shouldn't cancel it, at least until you pay off the other one as well. If you do, your credit score will either go down or it won't go up which it would if you left the card open.

Part of your credit score calculation is based on the balance you have on your credit cards versus the total credit that's available to you. If you cancel the card that is fully paid off, this ratio goes up which causes your credit score to drop.

eg. Using your examples, you have $6000 of outstanding credit, with at least $6000 total credit available (assuming both cards are maxed). So you have 100% credit usage. If you pay off $2000 of the debt, you now have $4000 outstanding on $6000 total available, or 67% usage. Canceling the $2000 card would keep you at 100%.

Cut up the card so you can't use it, but keep the account active.

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3. ANNOUNCEMENTS

ONE: Follow me on Twitter

http://www.twitter.com/debtsmackdown

That way, if you don't get my emails for some reason, you'll get my Twitters.

TWO: Do you have a question?

Do you have a burning question that you'd like me to answer in this newsletter?

You can submit your questions through the website here:

http://www.debtreductionacademy.com/contact.php

I can't promise a personal response, but I'll do my best to answer your questions in a future issue of the newsletter.

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4. FEATURED ARTICLE

What Is Debt Consolidation Really Going To Cost You?

Consolidation is one of the most talked-about ways of dealing with debt. You'll see offers from lending companies, credit cards and even your bank, suggesting you take out a loan to pay off all your existing debts, combining them into a single payment with a lower interest rate in some cases. But the question is, is this a good idea? It sounds like it, but what is debt consolidation really going to cost you?

There are several things you need to consider before signing up for any kind of debt consolidation loan.

Are You Really Going to Be Saving Money?

If you are consolidating credit card debt, chances are you'll be paying a lower interest rate on your consolidation loan than you are on the credit cards themselves.

But a lot of consolidation loans require you to combine all your debt - not just credit cards - so you might have to include other loans which may have lower interest rates.

If this is the case, you need to determine whether or not what you save on the credit card debt is going to be lost on the rest of the loans you're consolidating.

How Long Will You Be Paying?

When you take out a consolidation loan, you're going to be starting from square one and will have that loan for whatever term you sign up for.

Again, if you're combining existing loans into the consolidation, you could end up paying them off for a lot longer than is left on the original loans.

For example, if you have a loan that has 12 months left before it's paid off and you consolidate it along with the rest of your debt, using a 48 month consolidation loan, you're going to be paying interest on that debt for an extra 36 months.

Even if the interest rate is lower, you'll likely wind up paying more interest in the long run.

What Are You Putting At Risk?

This is one of the biggest problems with most debt consolidation programs - what you're putting at risk.

Credit card debt and other consumer debt is generally unsecured. That means that there is nothing "backing" the loan for the creditor to repossess if you don't pay the debt.

This is the opposite of secured debt, which is usually things like your mortgage or your car loan. If you stop paying, the lender can foreclose on your home or repossess your car to recover their money.

When you take out a consolidation loan, they are often secured by some kind of collateral, most often home equity. These home equity lines of credit (HELOC) are essentially another mortgage on your home. If you can't pay, they can foreclose on your home.

By doing this, you're essentially taking unsecured debt and converting it to secured, putting your home at risk. If you ever lose your job or suddenly can't pay the debt for some reason, your home will be on the line.

Debt consolidation can work for some people, but in most cases there are more risks involved than there are advantages.

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5. NEWSLETTER ARCHIVES

I'm in the process of getting all the previous issues of the newsletter posted on the Debt Reduction Academy website.

Once they're posted, I'll include a link here in the newsletter.

A lot of the questions I get from people are repeated over and over. If you've got a question, I might already have answered it in a previous issue, so you'll be able to check soon.

Copyright 2009 Nichescape Publishing Inc.