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Debt Consolidation Facts

1. If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will identify you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (Fair Isaac).

2. If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

3. Out of a random sample of 3 million American consumers (included in Experian's National Score Index), 51% of them have at least 2 credit cards and 14% of them have 10 or more credit cards.

4 Ways to Successfully Control Debt

(August 8th, 2007)

Increasing amounts of debt will always have a negative impact on your credit score even if you are always punctual in your credit card payments. Successful and financially free people know how to take out debt, what types of debt to take out and how to manage their debts. Financially free people can easily differentiate between good debt and bad debt. Here's a tabular summary of good debt v/s bad debt:

Good Debt
Bad Debt
  • Mortgage loan
  • Business / Commercial Loan
  • Real Estate Loan (Home Equity Line of Credit
  • School Student Loan
  • Auto loan
  • Credit card debt
  • Store credit cards
  • Gambling debt

Now our focus on this page is 4 smart ways to control debt. The most basic step is to AVOID taking out any of the above "Bad Debts." This can be hard for many people, take auto loans for example. Most people do not have enough cash on hand to fully purchase a car in cash, unless it is a $1000 car. Furthermore, most people carry Sears or Walmart credit cards, so the "Store Credit cards" item cannot be deleted from the list.

1) Take Out Debt at Lowest Interest Rates Possible

If your credit card company charges you an interest rate in the 13% - 15% range, shop for other credit card companies that offer lower interest rates. If you have been a loyal customer to your credit card company for many years but have not seen a reduction in the interest rates charged, try to negotiate a deal with them to lower interest rates. Advise them that you have been a loyal customer to them for many years, but what are you getting from this loyalty? If they are not willing to lower the interest rate, advise them that you are shopping for another credit card company with lower rates and will be transferring your balance at any time soon. Credit card companies want to have long term loyal customers, so if they hear your statement about transferring your balance, they would be more than willing to co-operate with your demands.

Tip: Negotiating a better interest rate will be easier if you have good credit, have been punctual with your credit card payments, do not have any late payment history and have been with a credit card company for a # of years.

If you do find another credit card with lower interest rates, do not hesitate to conduct a credit card balance transfer. Use our Credit Card Balance Transfers Checklist to do this properly. Use these guidelines to make sure you get a good credit card transfer deal:

  • Is the new lower interest rate that you are getting just an introductory rate?
  • What happens when the introductory period is over? Does the interest rate go up? How high does it go up?
  • What are the fees and charges you will pay when transferring your credit card balance?
  • Make sure you know the minimum payments on your new credit card, any annual fees, the APR, finance charges, etc. learn more about all these credit card terminologies, go to 12 Important Credit Card Terms or Terminology You Need to Know

2) Do NOT Rack up Debt

Do NOT use your credit card to buy that McDonald's burger or that new Plasma TV. Follow this rule and you will be sure to keep your debts in control:

I Will Purchase Something on my Credit Card -> "ONLY IF" -> I Have Enough Cash to Pay For It!

Build yourself an emergency savings cushion so that incase of emergency, you do not have to charge your groceries to your credit card, you can use the cash in your emergency savings fund to pay for those groceries. Credit card companies are actually moving to the phase when they will eliminate any grace period. Therefore, if you make a purchase on 1st June of $200, you will start paying interest on 2nd which is the next day. There will be no 30 day grace period!

3) Minimum Monthly Payments?

If you pay only the minimum monthly payments stated on your credit card statement, you will NEVER be debt free. Those minimum monthly charges are used to extract payments from your wallet for a lifetime, because the credit card company always wants to keep a customer who will keep paying interest after interest charges for a long period of time. Making even $20 - $50 extra per month will save you thousands of dollars over the long term. You should set yourself a goal when you want to fully pay off your credit card debt. Use our article on Do It Yourself Debt Reduction to help you reduce debt as well as the Debt Payoff Calculator to set a date when you want to fully payoff all your debts.

4) Always have a Budget

Create yourself a budget like the one below. Write down all your monthly expenses including groceries, rent, car insurance, utilities, student loan payments, etc. Whatever money you have left over will be used to pay off your debt with the highest APR.

Consider the following example. Peter has an after-tax monthly take home pay of $2000. After paying off all his expenses every month, Peter has $450 remaining to pay off any debts owed. He should therefore allocate this $450 towards paying off debt that has the highest Annual Percentage Rate (APR). This is the fastest way to reduce your debt.

After Tax Monthly Take Home Pay: $2000
Monthly Expenses:  
Groceries $400
Rent $600
Car Insurance $150
Utilities $200
Student Loan Payments $300
Remaining amount goes towards paying off debt with highest APR $450

Continue this process every month until the debt with the highest APR is fully paid off. Once it is fully paid off, move on to the next debt that has the highest APR.