Watching Your Interest Rates and Debt Consolidation

A quick way to reduce your monthly bills can be to switch from high interest rate credit cards to a debt consolidation loan or a lower interest credit card (balance transfer). This depends upon the total outstanding balances and APR (annual percentage rates) of your existing debts. Often, it makes sense to transfer your balances to a lower rate loan or card. Some times it does not.

Keep the following in mind

  1. When consolidating debt into a loan, remember that your payments will be scheduled and fixed. Unlike a credit card, which allows you to just make a minimum monthly payment, most loans are structured for fixed terms and payments. The consolidation of debt can certainly make things much simpler. However, in an effort to get out of debt sooner, make sure that you do not strap yourself with too high of a monthly payment. A responsible lender should do this for you. Regardless, be sure to set terms you know that you can budget for. Then, if you have extra money available, add to your required payment and be sure to instruct your lender to apply the extra amount to the principal balance of your loan. Please note: Some home equity and consolidation loans charge penalties for paying too much a percentage of the remaining balance in a payment, or for paying your loan off early. Pre-payment penalties are not allowed in all states, but never assume anything. Thoroughly read your loan documentation and ask any potential lender questions about anything you don’t understand… before you sign the loan documents! If they are unwilling to answer your questions to your satisfaction, leave the offer on the table. There are plenty of reputable lenders willing to fight for your business. However, if you already have an existing loan, and will incur a penalty, be smart. Save the money and put it into a bank account. Next time you experience an emergency and go to reach for your credit cards, stop! You will have the money in the bank.
  2. Debt consolidation loans or credit card consolidation / balance transfers are great for helping you simplify and lower your monthly payments and get things under control. However, too often, the irresponsible behavior that got consumer after consumer intro trouble in the first place returns. When you consolidate debt, it is not a green light to break out the plastic and go shopping. It is a second chance to put yourself on a solid financial path, and you should take advantage of it. Do what is suggested above. Make extra or larger payments. Or, open a savings account and build an emergency fund for things that may come up. In addition, prepare for the holiday shopping season and save up. When buying gifts, keep the credit cards in your wallet or purse. Better yet, cut the cards up, close the accounts and then you won’t have to worry about the temptation to use them.

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