On average, according to Federal Reserve statistics combined with other government information, US Household credit card debt is at around $7,529.
If we only look at households that are indebted this average outstanding debt climbs all the way up to $16,140.
U.S. household consumer debt profile as of October 2015:
- Credit card debt average: $16,140
- Mortgage debt average: $155,361
- Student loan debt average: $31,946
What American consumers owe, In total:
- $11.85 trillion in debt
- This is a 1.7% increase from last year
- $890.9 billion in credit card debt
- $8.17 trillion in mortgages
- $1.19 trillion in student loans
- This is an increase of 7.1% from last year
With these statistics, It’s no surprise that so many Americans are looking for different ways to reduce debt on their own. Many credit card debt problems are too big to handle alone, so people call me to help them find the right solution.
As a debt consultant, I get questions about many different debt relief programs, but for this post I’m going to focus on questions I get about debt consolidation.
“Is Debt Consolidation a viable option?”
“If I opt for debt consolidation, will it eliminate all my debt?”
“Can home equity be used to consolidate debt?”
“Are there any trustworthy debt consolidation companies out there?”
“Does debt consolidation have alternatives?”
All of these questions are very important for anyone who is looking to resolve their credit card debt issues. As a professional debt consultant I feel obligated to give people who contact me the most precise and current information on the matter.
Let’s take an in depth look at the questions that are being asked.
- Is debt Consolidation a viable option?
Before answering this question I always make sure that people know what debt consolidation is.
Wikipedia describes Debt consolidation: “is a form of debt refinancing that entails taking out one loan to pay off many others. This commonly refers to a personal finance process of individuals addressing high consumer debt but occasionally refers to a country’s fiscal approach to corporate debt or Government debt. The process can secure a lower overall interest rate to the entire debt load and provide the convenience of servicing only one loan.”
So in theory it sounds great. You have past due credit cards with high interest rates, you take out a loan with a low interest rate, you use the loan money to pay off your outstanding credit card debts, and you focus on paying the new loan off (at a lower interest rate). Easy right?
Well, not really. The process is a lot more strenuous than that, and of course the whole part about the interest rate being lower and paying off the loan is easier said than done.
Let me go over it in more detail for you.
- How does Debt Consolidation work?
The first thing you need to realize is that, at the end of the day, Debt Consolidation is a business. In order to help you, they have to make a profit. So how does debt consolidation turn a profit?
I’ll give you guys an example:
Let’s say you have $30,000 in unsecured debt (credit card debt): a 2 year $10,000 loan at 12% and a 4 year loan at 10%. This would mean that your current monthly payment would be $1,100 a month ($517+$583). This is when the debt consolidation company will tell you they managed to lower your monthly payments to $640 dollars a month and that your interest rate is now down to 9% by combining the loans into one and negotiating with your creditors. This looks very appealing right? At first glance most people wouldn’t balk at cutting down their monthly payments by $460.
There’s one crucial piece of information that one should take into consideration. With this plan, It is going to take you atleast 6 years to pay this new loan off. At this point some people might think, well 6 years isn’t so bad; once they figure out how much money they will have paid at the end of the six years, $46,080 compared to $40,392, most people are turned off. So even though the interest rate is lower, 9%, the repayment time is longer and the total balance is larger.
This is why I always advise that it is important to look at different debt relief options before pulling the trigger on one. Everyone’s debt scenario is different, some have only credit card debt, some have student loans, others have home equity lines of credit to pay off, and some have all 3 issues.
- If I opt for debt consolidation, will it eliminate my debt?
Robert Berger from USNews.com Answers this question elloquently: “If the ultimate goal is to climb out of debt, consolidation loans don’t have a good track record. Estimates suggest that at least 70 percent of those who consolidate their debt end up with as much or more debt a few years later. For example, one might consolidate credit card debt into a single loan, only to max out the credit cards with the newly found available credit. Think of it as yo-yo dieting, only with debt.”
One must keep their financial goals in mind. If the goal is to completely get out of debt, perhaps taking out another loan (getting into more debt) isn’t the savviest move out there. But if you’re looking for some breathing room, some time to organize your finances, perhaps you’ll be coming into some money soon: a bonus at work, an inheritance, etc, then debt consolidation could be your temporary answer.
- Can home equity be used to consolidate debt?
This is one of the situations where debt consolidation can cause serious harm to your financial stability. If you consolidate your debt through a home equity loan, your home is now at risk (It could be a good choice for a few unique cases).
If you use one of these types of loans to consolidate your debts, make sure you keep in mind that your home’s pink slip is the guarantee. It might look like an appealing plan, quick cash, with a low interest rate, but you’re playing a dangerous game of cat and mouse. The unsecured debt you had just turned into debt that’s secured by one of the most important assets a person can have, your home.
If you end up deciding to use this strategy, make sure you have no problems making the payment. In addition to this, you should make sure you have a minimum of 20% equity on your home before you get a second mortgage or line of credit.
*Note: If you fail to make your payments, you are putting yourself at risk of foreclosure, just as if you would have failed to make your primary home mortgage payments.
- Are there any trustworthy debt consolidation loans out there?
Of Course there are! This is why it is so crucial for you to educate yourself and research anyone you’re looking to work with. You should look at their online ratings and reviews from trusted sources. If you don’t, you could end up in a terrible financial situation. So be careful, in order to prevent this from happening, you can follow the tips i’ve provided below:
- Dont trust any plan that doesn’t take your specific situation into account.
- There are no government programs that erase your debt. So don’t be lured by these con artist.
- Make sure you read everything carefully, you can never be too cautious in these situations.
- What are my options? Does debt consolidation have alternatives?
There are actually a few alternatives out there, you just have to know where to look. According to Sarah Latham from The Simple Dollar, one of the best alternatives for debt consolidation is debt settlement.
It’s always best to have a good understanding of how these programs work though. Don’t just take my word for it, research and understand it. Debt settlement is a straightforward process, the company negotiates with your creditors on your behalf in order to reach an agreement to pay LESS than what you currently owe.
In order to make sure you understand how debt settlement works here are a couple of good resources:
- What is debt settlement?
- Step by step debt settlement (debt negotiation) process.
Remember that debt consolidation doesn’t really reduce your loan principals like debt settlement does. Most people seem to think that debt consolidation will reduce your total debt, this is because they often times confuse the two.
It all depends on your financial situation! Debt consolidation can be an excellent option for someone with credit card debt. The best debt-consolidation loans will allow you to stay organized and pay off your debt with a reasonable interest rate and affordable monthly payment. Remember that these types of loans are far and few between and that here are alternatives. If you’re uncertain where to begin make sure to consult with a professional debt consultant. Good luck!
About the writer:
Andrew Macia has been a debt consultant for over 8 years and has helped hundreds of individuals become debt free. He is currently working on increasing his financial writing portfolio by guest writing on a variety of reputable financial blogs and online magazines. Check out his profile on LinkedIn.
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