“We owe, we owe, but off to work we can’t go…”
(I could never do the whistling right.)
The debt game may be changing, thanks to the recent outbreak of Covid-19, the first coronavirus for which most of us have learned a specific name. Unemployment may skyrocket, and no one’s entirely sure what the economy is going to do over the next few months. Many of us are “sheltering in place” – a fancy new term for “staying at home all the time.” When we DO go out, we’re supposed to practice “social distancing,” which is the new way to say “stay away from me, I don’t want to get whatever you have!”
Stuck At Home and Still in Debt
If you’re currently being directly impacted by the virus, you no doubt have some scary things on your plate. We wish you well and hope it won’t be long before we can look back and mutter something to the effect of, “Whoo! That was crazy, but everyone seems to be OK…”
For the rest of us, however, we’re mostly either working from home or pretending to so we’ll still get paid. A few have started to get a bit stir crazy, while others have taken live streaming to a whole new level – or at least a whole new quantity of the same low level. These may be dark and difficult times, but if right now that mostly means you’re trapped and bored, this is as good a time as any to talk about tackling those bills you hear arrive in the mail every day and those debt collection calls which were easier to ignore when you were at work.
I know – as if things weren’t bad enough, I had to go and talk about money problems. If ignoring bad things would make them go away, however…
Well, if it worked that way, we wouldn’t be having the current coronavirus epidemic, would we?
Good Debt, Bad Debt, and Too Much Debt
Not all debt is evil. Debt is a tool that allows us to make major purchases like homes or vehicles on affordable terms. Without modern financial structures, most of us would never be able to save up enough to own a nice home or drive a new car. Responsible use of debt allows us to weather rough times while still putting food on the table and meeting basic needs. It lets you buy school clothes for your kids in August but pay for them in September, October, and November – just in time to start over with Christmas presents paid for in January, February, etc.
Debt Consolidation or Balance Transfer Card
Debt allows you to start a new business or pay for a wedding or go to college. Careful use of debt can act as an investment in your long-term comfort and security. It’s the next best thing to the sort of accumulated wealth available to very few.
Unfortunately, debt can easily become a trap – a swamp in which you feel trapped and overwhelmed. That’s the problem with freedom. It gives us all these amazing opportunities to screw things up. Other times, though, you can actually do everything just about perfectly and unexpected events still grab you, shake you around in their teeth, and throw you into that same swamp, still a bit battered and bruised.
At that point, debt no longer feels like a tool. It’s not working for you anymore; you’ve become its slave (or at least its indentured servant). You keep paying and paying, but the balances don’t feel like they’re getting any smaller. In fact, you’re pretty sure they’re still growing, despite how hard you keep working. The other night you woke up and could have sworn they were leaning over your bed with glowing red eyes and sharp, dripping teeth, mocking you.
Metaphorically, I mean. At least, I hope it’s metaphorical. If that’s literally happening to you, you need a priest before moving on to learn about various types of consolidation loans.
Debt consolidation won’t make the debt magically go away, but it might help you take back control of your financial world, and through that, the rest of your world as well. It won’t be quick or easy, but it doesn’t have to be as hard as it sometimes seems. And you don’t have to do it alone.
Debt Consolidation Loans
The idea behind debt consolidation is simple. You owe different amounts of money to many different places under many different terms. The constant payments coming due are overwhelming – sometimes more than you even make in a month. Half the time you’re late because you can’t afford to pay for everything, and the other time you’re late because you simply can’t keep track of it all.
A debt consolidation loan is the most common solution to help you out of the swamp. It’s basically a personal loan with a specific purpose – debt consolidation – and traditional loan terms. A debt consolidation loan is generally unsecured and carries a fixed interest rate. “Unsecured” means you’re not offering up collateral as security for the loan. If you’re dealing with serious debt, it’s unlikely you have substantial collateral other than possibly your home, and we don’t want that on the line if god forbid something were to go seriously wrong and you couldn’t make your payments. “Fixed interest” means that whatever interest rate you agree to at the time of the loan remains the same over the life of the loan, making your monthly payments consistent and thus easy to budget for.
Advantages of Debt Consolidation Loans
There are numerous advantages to the right debt consolidation loan:
- It replaces multiple monthly payments to a single monthly payment. This means stretching your total debt out over a longer time period, so that each monthly installment is less than you were trying to pay in total each month
- Paying off multiple creditors means no more late charges or penalties from multiple places
- The right debt consolidation loan may carry a lower interest rate than the average you’re currently paying to various creditors, especially if you factor in those late charges and other fees we just mentioned
- A lower overall monthly payment means more money freed up to take care of your priorities and those you love. While paying down your debt is a priority, it’s rarely your ONLY priority
Disadvantages of Debt Consolidation Loans
Let’s be equally honest about the potential disadvantages of a debt consolidation loan:
You still owe the money. This isn’t actually a disadvantage so much as a reality check. It’s easy to overlook the fact that taking more effective control of your debt isn’t the same as your debt going away – it’s just not in charge anymore. You still have to pay it, but now it’s far more possible to do so in a way that works for you.
If you’ve been struggling with debt, you may not have a great credit history or a high credit score. That doesn’t mean you don’t have options. There are reputable online lenders who specialize in situations just like yours and who offer debt consolidation for poor credit.
Realistically, however, your interest rates may not be as favorable and there could be upfront fees for getting started. Pay attention to the details and don’t take a bad deal out of desperation. Still, the chance to take control of your debt and begin rebuilding your credit may still be worth it. Bad credit doesn’t have to be a permanent condition.
Be Careful, You Still Have a Debt
Arguably the biggest danger in any debt consolidation scenario is that you’re going to suddenly eliminate a lot of debt. I know that sounds ridiculous – isn’t that the whole idea? Of course it is, although we should revisit the point above about the debt not being “gone” so much as “restructured.” The danger comes in the form of this suddenly clean slate with different creditors. Your credit history is going to show that you’re free of what ailed you, and your credit score will begin to creep up. Those credit cards are going to have the same high limits but balances of ZERO across the board. Plus, you’re going to suddenly have what may feel like ALL this extra money every month.
In other words, the greatest danger is that you’ll go right back into debt again – a small purchase here, a simple night out there, until before you know it, you’re right back where you began. Well, not quite, because now you have all those same debts PLUS your massive debt consolidation loan to pay for.
That’s why consolidation loans should always be considered as part of a larger effort to take control of your budget and your overall personal or small business finances. It’s not enough to put out one fire; you need to stop throwing matches in the gasoline.
By Way Of Example…
Last fall, I was rather ill for several months. (This was well before the whole Covid-19 thing.) I lost something like 30 pounds in two months. Now, I realize this is not how weight loss is supposed to work, and I didn’t like the part where I thought I might die, but I confess I didn’t mind dropping the weight. That got me down to pretty close to where I’d like to be, although I still looked a bit rough as a result of the illness.
Then I started to get better. The doctors finally narrowed down the cause, got me on some overpriced medication, and before long I was back to my old self. Of course, I was going to do everything in my power to avoid putting all that weight back on! Well, everything except dramatically change my eating and exercise habits. Turns out those were the problem all along.
What took me two months of serious illness to lose took about three months to regain – almost to the pound. It’s not genetic, it’s pizza delivery and a fondness for ginger ale. Debt consolidation is the same way, minus the colonoscopy. Get serious about a written, regularly referenced household budget. Use it. Make it work for you.
It’s not about me or anyone else telling you what you can or can’t do with your money. It’s about you being honest and clear with yourself about what you’re choosing to do with your money. A budget merely helps you do that, even if you don’t really want to.
Balance Transfer Credit Cards
You’ve no doubt seen the ads and maybe received an offer or seven in the mail recently. “No interest on balance transfers!” “Zero percent APR for 24 months!” “You’re Pre-Approved to Apply (**approval not guaranteed**)”
What about it? Are these low-interest or no-interest credit cards a good option for debt consolidation?
Maybe. But only in some very specific circumstances.
If most of your current debt is credit card debt, and your current credit cards carry relatively high interest, a balance transfer might be a good move. You should first make sure you know what rates your cards are actually charging, which isn’t always as easy as it sounds. Somewhere on the same website you use to check your balance or make payments, there should be information about the interest you pay, usually expressed as a particular amount or percentage on top of this or that current market rate. That’s how APR works – you start with a relatively low rate, then it varies with market rates periodically. You can end up paying way more than when you started, or sometimes a little less.
If you can’t find it, call the card company. They’re legally obligated to explain this to you, and they don’t exactly try to hide it, despite it being a bit tricky to decipher on the website or those periodic “policy updates” they mail out. Until you know this rate or the formula used to determined your rate, you can’t compare it to the new card you’re considering.
Attention Please: Credit Card Rate
Now you need to pay particular attention to the MULTIPLE rates being offered by the new card. Presumably, it’s promising you a year or more at some ridiculously low rate or zero interest or whatever. Does that apply to transfers as well as new purchases you might choose to make with the card, or only to one or the other? More importantly, what happens AFTER the introductory period? What will the interest rate be then? You don’t want to end up worse off than you were before.
You could use a lender finder service online to help you find the right credit card for your needs. Loanry does this for you! We gather information about you and your needs and we connect you with the lenders that may have what you need.
Advantages to Balance Transfer Cards
If you’ve read all the small print and run the numbers, the biggest advantage is that a balance transfer card can conceivably save you serious money. Like with cell phone plans or cable TV packages, it seems it’s always easier to get a great deal from the company that wants to steal you than from the company who claims they’d like to keep you.
If you care about points or miles or rewards or cash back programs, a balance transfer card gives you the opportunity to move from a card that doesn’t offer the features you want to a card which does.
Most of all, balance transfers between credit cards are pretty straightforward compared to traditional loans. You fill out a little basic information, and if you’re approved, it’s almost like charging the debt from your old card onto your new card- quick and painless, more or less.
Disadvantages to Balance Transfer Cards
The biggest is that eventually, those promotional rates end. I realize we’ve already covered this, but it seemed worth repeating.
The other danger is similar to that of a debt consolidation loan. Once you transfer your balance to the new card, you suddenly have 2 or 3 credit cards with the same high limits and zero balance on them, just begging you to use them again.
If this is going to be a temptation, then close them. Eliminate the temptations. That’s not the ideal choice, but it’s better to cut them up than to fill them up.
A better option is to lock them up. Put them in the safe or somewhere else secure in your household. The available credit will help your credit score and you can always access them in emergencies. It’s best to get them out of your wallet or purse, however – no sense leaving Oreos around if you’re serious about your diet, right?
No matter what your debt situation, you have options. It may not feel like it, but there’s almost always a way forward. And look at it this way… the more hopeless it feels, the less likely it is that things could honestly get much worse, right?
Stay safe, stay patient, and kind with one another, and keep following expert medical advice. And if you decide to tackle some debt management while you’re at it, we can connect you to reputable online sources who would be happy to help while maintaining COMPLETE social distancing. Just let us know when you’re ready!
You can do this.
Blaine Koehn is a former small business manager, long-time educator, and seasoned consultant. He’s worked in both the public and private sectors while riding the ups-and-downs of self-employment and independent contracting for nearly two decades. His self-published resources have been utilized by thousands of educators as he’s shared his experiences and ideas in workshops across the Midwest. Blaine writes about money management and decision-making for those new to the world of finance or anyone simply sorting through their fiscal options in complicated times.