Editorial Policy

Consolidating debt can help you defeat it

Erica Sandberg

October 16, 2013

QDear Erica,

I have about $8,000 in debt. I would like to combine all my debts together. I don't have much income, but I am paying them on time for the most part. How can I get them all combined so that I have one payment and not seven? — Jackie

AHi Jackie,

Yes, let's get rid of all that debt, in the most effective, efficient and easy way possible! You've got quite a few accounts to deal with, which can get mighty confusing. At the very least, it's annoying to have to write so many separate checks each month, and probably all on different dates. Synthesizing the process will help.Ask Erica

Before attempting to reduce the number of accounts, your first step in “operation debt deletion” is to stop adding to the balances. Remove the cards from your wallet and don't use them again until you're in a better place. It will be much easier to track your progress this way. You'll know that if you send $300 to a creditor, that sum (minus finance charges) will be deleted from your balance, and your liability will be that much lighter the following month.

As for debt consolidation, there are various ways to turn several debts into one. Here's a basic run down on what's available:

1. Going to a credit counseling agency and enrolling in its debt repayment program. The cards remain in your name, but you pay through the agency's service (for a small monthly fee). The agency can often get your interest rates lowered so more of your payment goes toward the principal rather than finance charges. You must agree to close your cards, but stick with the plan, and you'll be in the black in fewer than five years. Oh, and the money comes out of your account automatically, so all you have to do is make sure you've got the payment covered.

2. Getting a consolidation loan from a bank or a credit union. If your credit rating (and income) is good enough, the bank may consent to loaning you enough money to pay debts. That would leave you making a single payment to the bank to pay down your loan. If this sounds attractive, start with the financial institution you already use for your checking and savings accounts and ask if you qualify. Keep in mind that the interest rate for the loan may not be better than what you have cumulatively, so make sure you crunch the numbers to make sure you're coming out ahead. Now, banks also care about income, so if yours is too low to comfortably meet the payment, you will likely be denied.

3. Making a balance transfer. This option involves moving one or more card balances to another card, preferably one with a low-interest or no-interest promotional period. Maybe you have a credit card or two with excellent interest rates and enough of an available credit line to absorb some of the others that have worse rates. Or, you might consider applying for a new credit card with a lengthy 0 percent introductory rate for balance transfers. Most cards will charge a fee of about 3 percent of the amount you transfer, so see if you'll come out ahead by running the numbers first. While you may not be able to put all the debt on just one card, perhaps you can consolidate it on two or three.

If none of the above options works for you, you can create your own payoff plan where you whittle the card debt down strategically. Follow these steps:

–  List the cards in order, by their balances.

–  Total up the minimum payments for each of the cards, and add on any extra you can pay each month by cutting down on unnecessary spending.

–  Send the most money to the card with the smallest debt and the minimum payments to the others. When one card is at zero, you've got six to deal with.

–  Keep going this way until you have one card — and then no cards — remaining.

It's not the cheapest method for paying down debt — paying the maximum to the account with the highest interest rate, rather than the highest balance will cost you less in the long run. Yet paying down debt is often a psychological battle. Attacking the biggest balance first and moving on to smaller targets can be a more motivating route for many. The important thing is that you pick the battle plan that helps you stay on track.

As your debt diminishes, consider asking your creditors to lower the interest rates as you go along. With steady, concentrated payments, they may give you a break.

Got a question for Erica? Send her an email.