DIY Debt Help

Do-It-Yourself Debt Consolidation: Does It Ever Work?
You have a lot of debt piling up and, uninvited, you get a
letter from a credit card company suggesting that you write
one of their handy checks and pay off your high-interest
debts and put them on a brand new credit card. The kicker
to the offer is that this new credit card is going to
charge you no interest.

Should you do this?

In a way, this is a mini-version of what debt consolidation
is all about. Debt consolidation is a way of dealing with
overwhelming debt by gathering it together (consolidating
it) into one large debt. The idea is that you can likely
get better terms (less interest) on one large debt than on
several smaller debts. Besides that, one payment a month
keeps life simpler than having to make a dozen or more
smaller payments (and there is less risk of missing a
payment and getting a black mark on your credit report).

Still, caution is warranted. The first thing you need to do
is review the actual offer extended by the credit card
company. While zero interest is no doubt true, no company
is going to extend that offer to you without some strings.
Typically, the two main strings to look for is "how much?"
and "how long?"

For instance, you may only be able to consolidate a
specific amount of money to the new zero-interest offer.
Let's say it's $5,000. If you want to consolidate about
$5,000 worth of debt or less, this is a workable amount. If
you're facing $80,000 worth of debt, this isn't going to
help much.

Next, you need to realize that the company will set some
very specific time limits on the offer. You may get zero
interest for a few months or even a year or more. But there
will come a day of reckoning when you go back to a regular
(or even higher-than-regular) interest rate.

Some offers for no-interest loans require that the loan be
paid in full by the due date otherwise all of the interest
is due. Furniture stores often extend this kind of credit.
Let's say you buy $10,000 worth of furniture and the store
says you can borrow that money free for one year instead of
at the store's usual rate of 22% (yes, a lot of furniture
stores charge rates that high). If you pay off the entire
$10,000 before the year is up, you owe no interest. But
let's say you paid $9,950 before the year was up but on the
day the offer expired, you still owed $50. In this example,
the company would be within its rights to charge you
$2,250-that's $50 for what you owe and the $2,200 interest
you owe because you did not pay the loan in full by the due
date.

So find out how much money you can consolidate and how long
the zero-interest offer lasts (and what happens when it
expires). Then you need to do some number crunching and
soul searching to figure out if you can honestly expect to
pay it off on time. For instance, if you owe $5,000 on a
variety of credit cards, you can take two or three years to
pay it off. If you consolidate this to a zero-interest
offer, you may put yourself under the gun to pay it off in
one year. Can you do that? Sit down and figure it out (in
this case, it means paying in about $417 a month, minimum,
without fail).

The other issue involved in debt consolidation involves a
process I call "stopping the bleeding." Debt is like a
money hemorrhage. Just as no person can hemorrhage blood
indefinitely without suffering dire, even fatal,
consequences, nobody can hemorrhage money for too long
without financial disaster.

If you are still hemorrhaging cash, there is not much point
in consolidating your debt. That's like taking an aspirin
when you need a tourniquet. Debt consolidation works best
when the debt is a finite thing (for instance, you got in
serious debt over an accident or medical problem) or when
you have figured out how to end the cycle of spending more
than you make. In other words, debt consolidation will help
you clean up your financial mess once you have solved the
root cause of your indebtedness.

Are these low-interest or no-interest loans a good deal?
Actually, they can be, but they are better deals to highly
disciplined money managers than to the debt-laden. If you
are already struggling with too much debt, taking on a
somewhat large debt with a ticking clock can be a lot of
stress-and require more financial discipline than you have.

Another downside of the no-interest credit card offer is
that it puts another credit card into your wallet, and one
that you will be encouraged to use. If you already struggle
with credit, you really don't need to add more temptation
to your life.

That does not mean debt consolidation is not a good
solution. If you can get a handle on your debt situation,
figure out how to stop the downward spiral, and then work
out a budget and plan to get free of debt, debt
consolidation can be a great solution. In fact, it's a
financial method used by large businesses and wealthy
individuals to handle special financial situations. The
trick is that there are many ways to consolidate debt and
other ways that can be much more advantageous to those
struggling with overwhelming debt.


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