Dear Steve: I have $30,000 in credit card debt that I want to pay off. I have had trouble juggling what is paid when, so I missed some payments. This has affected my credit score. I can make the payments, but the interest rates are high. I want to consolidate into one payment, so I know when it is due and can put more down each time. I don't want to use a mortgage or home equity line; I just want the cheapest rate. Do you have any suggestions?
Dear Reader: I'll bet you feel as if you are juggling porcupines, not bills. Every time you mishandle one, it sticks you. But don't worry, we'll corral those spiky critters.
You're on the right track, but to be successful you'll need to change your spending plan and avoid buying on credit. You incur interest charges from the minute you slide your credit card at checkout. More expensive charges make it harder to catch up, so I want you to make a commitment not to use your cards for new purchases until you have a zero balance and then only when you can pay the bill in full. Put the cards in a container of water and put them in your freezer if you must.
For the organizationally challenged, it can help to consolidate many credit card accounts into one payment.
I agree you should avoid turning your unsecured credit card debt to secured debt with a home loan. Attempting to lower your interest rates -- and the overall amount you'll spend to satisfy the debt -- is also a great idea. Where debt consolidation can sometimes go wrong is when folks get too comfortable with the lower interest rates and payments and begin to use their cards to repeat the debt cycle again. So remember, no charging until you are free of credit card debt.
Now we'll take a look at your consolidation options:
Personal loan. You could try a personal loan if your credit score still has a pulse. If your income is sufficient, you may qualify for a lower interest rate loan with an affordable monthly payment. Be sure the loan allows for early payoff, because it appears you want to pay off your debt quickly. I recommend structuring the loan with a monthly payment that is easily affordable. You can always make additional payments, but you don't want to default on the loan if you have a hiccup in your income or an unexpected expense.
Balance transfer. Keep an eye out for low- or no-interest balance transfer opportunities. However, be wary of fees and of getting too close to the credit card's limit.
Debt management plan. A nonprofit credit-counseling agency can work with you and your creditors to create a repayment plan. Then you would make one payment to the agency, which would disperse payment to all your credit card issuers. You should receive better interest rates, and the plan would include total repayment within five years. You would have the option to pay more than the agreed-upon monthly amount to pay off the debt faster.
One caveat of debt management plans that I find positive (some may view it as a negative) is that the accounts placed on the plan are closed, and you are not able to use them to add to the balances. You can often leave a small balance account out of the plan if you need a credit card, say for business purposes. To find a reputable, nonprofit credit-counseling agency, check the National Foundation for Credit Counseling at nfcc.org or the Association of Independent Consumer Credit Counseling Agencies at aiccca.org.
(Steve Bucci is a personal finance coach and author of "Credit Repair Kit for Dummies." Email him at debtadviser(at)bankrate.com. For more Debt Adviser columns, see bankrate.com.)
