Credit Card Debt Consolidation: An Interview with the NFCC

To understand the method, LoveToKnow Credit Cards sought the counsel of Nick Jacobs of the National Foundation of Credit Counseling.

What are the red flags that indicate a consumer has entered a danger zone with credit?

There are quite a few actually:

• Using a credit card to pay for things you normally wouldn't use credit for, e.g. groceries.
• Continually near the end of the credit line.
• Only making minimum payments.
• More than 15 percent of take-home pay used for credit card payments.
• Behind on basic necessity payments or skipping payments.

We’re led to believe we can just buy anything without any trouble. That’s like having your cake and eating it too without having to bake it. But you do have to pay for it.

What are the benefits of credit card debt consolidation?

Number one, it eliminates the stress factor. Getting control of your debts is not only responsible financial management, it also makes life easier.

Also, consolidation frees up income so you can save for a rainy day fund (generally three-to-six months of income), the “fun stuff” and retirement.

Please list the steps for successful credit card debt consolidation and the average length of time the process takes.

First of all, there has to be a commitment to paying off the debt, otherwise it will happen again. Depending on the size of the debt, there are many ways it can be consolidated.

1. A quick and easy way is to reign in spending and stick to a tight budget until the debt is paid.
2. Isolate the highest interest credit card and pay it off first, then work your way through the other cards one at a time.
3. An alternative to that is combining the debts into one big payment, either through balance transfers or a debt consolidation loan.

The time it will take to consolidate has everything to do with how much you're paying. Truth be told, it can take years, but with patience, it can be done.

We always stress to pay more than the minimum payment, so start by doubling that each month and work your way up. Think about it: trying to pay off $1,000 with only a $10 monthly minimum payment will take years, accruing interest the whole time. The more you can afford to pay, the faster it will go.

Are debt consolidation loans a good idea?

People just have to be careful. There needs to be a commitment to reduce spending and stay out of additional debt while paying off the previous debt.

You need some kind of collateral to pay the loan. Home equity loans are really popular, but drawing off home equity is a strong roll of the dice, as there’s a risk of foreclosure, the spending of an appreciable asset, using credit to pay off credit and so on. That can become a vicious cycle. Another thing to be aware of are the terms of the loan.

Once someone decides to consolidate, what changes in attitude and spending habits reinforce the decision to stay out of debt?

• Again, no stress. You're in better shape not being in debt and having some savings.
• Ability to handle emergency situations better.
• Developing a budget and sticking to it. It's for your own benefit.
• Take a $20 bill and track it: at the coffee shop, buying a magazine, whatever. Look at where you're spending your money and see if you can spend it better.
• Find different and/or low budget avenues for entertainment: rent books from the library, wait for a movie to come out on video, uncover the low cost/free events in your city. You don't have to sit at home and deprive yourself. This is a way to still live life and not go broke in the process.

If you are either going to save to get out debt or save for a vacation, it’s so important to keep your eyes on the prize. When you're sitting on that sandy beach and drinking from a carved pineapple and it's all paid for and you're not coming home to a huge credit card bill, that's a heck of a feeling.

There's no doubt that in the short term, it's tough and a challenge and that's part of it – but it's the whole "good things come to those who wait" mindset.

How can consumers wisely use credit to an advantage as part of their overall financial plan?

I hate to sound like a broken record, but while credit is a very useful tool, you have to use it responsibly.

• When you make a purchase using credit, have a plan in place as to how you’ll pay for it. Buy the plasma TV, but understand you're going to pay it off in three months and stick to it.
• Get yourself out of debt and become financially secure before thinking about credit cards with incentive programs.

What other advice do you have for credit card debt consolidation?

Don’t wait until you’re in trouble to talk to a credit counselor or any other financial expert. The mission of a nonprofit credit counseling agency is a real focus on financial education.

Credit counselors aren't just who you go to in a time of crisis: they can help develop a budget, analyze income and expenses and general debt, advise on how to get a better hold on expenses and live within your means. While an individual would have to pay for these counseling services, it's truly money well spent. Fees for advisors will vary by locale and extent in services

There’s a real dearth in knowledge about how to manage money. The JumpStart Coalition did a survey of American high school seniors on their financial literacy, and the score was 53 percent. Talk to a credit counselor, a financial planner at the bank, an accountant – anyone who can help you with better financial planning.

To learn more about credit card debt consoldation, visit The National Foundation of Credit Counseling.

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