Tag Archives: consolidation

Great (and common) Listener Question

Good afternoon George: I have been listening to you on the Phil Johnson show. I have also purchased 4 of your signed books.   One for each of my children and one for my Husband and I. Sadly, I have to admit that we have not been good money managers. With your books help I have been able to put away $10,000 this last year while paying off many more bills.  I have a question: I have a credit card with $11,000.00( the last thing to pay off) on it. I also have a line of credit for $29,000.00 with zero owing.  

Do you think it would be a good idea to pay the credit card off with the line of credit….. the interest on the LOC is way lower.   S.

Hey, S:

You saved WHAT? THAT is incredible! That HAS to mean you and hubby got on the same page on some of this…because that’s the only way it happens!

I only ever answer questions of what I would do because I never have all the information. I would do that immediately, but, and it’s a BIG but:

Have you learned your lesson and don’t want to get burned again? Over 80% of people who do a consolidation or move a credit card debt to line of credit have it back up to the same or higher balance within 24 months. That’s the “but.”

If so, and the odds are high, you’d have the $11,000 on the LOC AND another $11,000 or so on the credit card again, and have made things so much worse.

If you can save $10,000 in a year, you can pay this off by September….so transfer it and then take the $11,000 with tiny new interest divided by 9 months (or you pick the months) and  pay THAT every month. Don’t get complacent and drop down to the new minimum payment of maybe 200 bucks.

If you did not have a LOC and the credit card rate were 60% how ticked off would you be – and how motivated would you be – to pay that off NOW…no vacations, no eating out – every dollar going to get this insane rate paid off.

Take THAT attitude and pick a month you want it gone! And next date night with hubby spend five minutes discussing how the credit card got to $11,000, who thought it was a good idea to get it that high, and what’s going to stop you from ever letting that happen again. It didn’t sneak up on you and it didn’t happen overnight. You need to find a way to hit the stop and panic button at $2,000 and not $11,000 of credit card debt.

You’re doing GREAT – keep going!!! And, if they’re over 15 or so, tell your kids about your credit card issue. It’s a BIG lesson for them, makes you sound human and not “parent” sounding, etc., because it WILL happen to them…at some age…to some degree…and it’ll guarantee they’ll be comfortable in talking to you about it, instead of hiding it, and feeling all that stress…

Consolidation Loans – Don’t Do It

What are the first three letters in consolidation? It’s con – and that’s how you should think of it. The most important factor is that you need to change your thinking from percentage rate to dollars of interest! You get sold (or sell yourself on the idea) that you’ll have a lower payment, pay less interest, and get out of debt faster. Right – wrong – wrong…

If I borrow five dollars from you and you charge me 80% interest for two days, I’m going to owe you the $5 and two cents interest on Friday. Big deal – who cares, right? OK, but if I borrow $5,000 at 80% interest and owe it to you for a year, and not just two days, that interest is $4,000. Now it’s a big deal: $4,000 interest on a $5,000 loan!

What matters is always how much you owe and the length of time you owe the debt. The rate is only the third most important factor. What do banks push in their ads? It’s the rate, and never the term or amount. That’s like the magician who has you looking over there while they trick you over here.

On the surface a consolidation is really easy to sell to you and seems like a win-win: One payment, combining all the debts and at a better interest rate. But since it’s not the rate that matters, you will almost always pay:

-more in total interest

-over a much longer term

-and be in debt a whole lot longer

-and in debt for a whole lot more money, too.

If you owe $3,000 on a credit card at 20%: If you want out of that rate trap and consolidate, it stretches it to five or ten years. That option will cost you a lot more in interest – not in interest rate but in interest dollars! Or just pay $250 a month and get rid of it in a year, at a cost of $600 interest.

Your car loan may have three or four years left. Make the payments and you know the end comes sooner, rather than later. A consolidation won’t get you a much better rate, but will trap you into stretching the loan another five, seven, or ten years. It quickly doubles the interest you’ll pay, not to mention you aren’t going to own the same car for t10 or 15 years!

But those aren’t even the biggest drawbacks and traps. The biggest one is that 90% of the time you will now be putting up your house for collateral. Everything up until the consolidation was either no security, such as credit cards, or was borrowing that only had something specific for collateral, such as a car. Now, in combining it all, you’re changing all that and putting up your home for security. Right now, the worst that could happen is that the credit cards will write off what you owe them and your car may be repossessed. After the consolidation – you’ll lose your home.

And the worst trap: Over 80% of people who consolidate run up their credit cards again within two years! No, you’re not the exception. Stop kidding yourself unless you cut up all the cards that got you to the edge of the cliff in the first place or you’ll be in debt for twice as much as you started with. After that, the next step is bankruptcy.

Any ‘con’ solidation should only be done as a very last resort…and even then, there are better alternatives. What seems like an ‘easy’ way out makes things worse – much worse. Don’t do it – list your debts smallest to largest and attack the smallest one with every dollar you can free up. Then move onto the next smallest. That do it yourself plan will save you thousands of dollars and a lot of years!