Getting Personal Debt Under Control


The amount of debt families find themselves in, and the burden of that debt, have become increasingly prevalent in today’s turbulent economic environment. Significant debt, in part, can be due to some external factors beyond one’s control. However, it is primarily due to the financial decisions one has made through the years. Like a sudden, unexpected storm, this debt eventually manifests itself as an uncontrollable force.

Is Debt Consolidation an Answer?

When you become buried in debt, fear begins to creep into your mind, you begin to look for a way out, and one question that pops in people’s minds is debt consolidation a good idea? Reality is that substantial amounts of credit card and other consumer debt affect you emotionally and as well physically. Often times when debt is an issue, people don’t really search for proper guidance and simply jump at what sounds easiest (or best at the time).

In addition, large amount of debt affects your credit rating, the ability to buy or maintain a home, pay for your children’s education, and save money for emergencies or retirement purposes.

So is debt consolidation a viable solution? Debt consolidation is the combining of diverse loans, lines of credit and credit card balances into a single loan with a prearranged repayment schedule. The three main benefits of consolidating debt include:

1. Lower Monthly Payments/Lower Overall Interest Rate

2. Substantial Savings on Credit Card Interest – sometimes you can obtain a loan that has a lower rate.

3. One Monthly Payment as Opposed to Several

 With this type of consolidation, you feel more in control of your finances. You are systematically paying down your debt according to terms and conditions you can live with. You reduce your debt, while still being able to maintain your household and other responsibilities.

Should You Close the Old Lines of Credit?

While debt consolidation can be a viable solution (I even used it personally when I struggle with debt), you must also ask if canceling a credit card can hurt your credit? The reason this is important because if you were to pay off your credit cards (via debt consolidation) then it might not be the smartest to cancel the cards – despite how badly you may want them out of your life.

Consider your FICO score. One element of your FICO score calculation includes the number of credit accounts you have – and what you owe on those accounts.

Therefore, when you cancel a credit card, you’re left with less available credit. That increases your credit utilization ratio. This is a ratio of your credit balances to your available credit limits. Canceling one of your cards causes your credit score to drop. A proper level of available credit can cause your FICO score to rise.

Additionally, your credit history is a key factor in the calculation of your FICO score. If you have a credit card with a long history, it may be better to keep it. You have established your personal ‘credit history’, which can be beneficial to your credit score.

Finally, calculation of your FICO store also involves looking at the variety of credit accounts you have. Cancelling a credit card, especially if it’s your only one, limits the variety of credit accounts you have that help make up that credit score.

If you lack discipline and may charge back up your credit cards, then it’s probably best that you cancel them, regardless of the FICO impact it has.

Getting personal debt under control is not an easy task. It involves a commitment to sticking with a debt repayment program and learning to live on less than you make (often substantially). While debt consolidation may be a decent solution, I’d encourage you to avoid wrapping unsecured debt in a secured asset. In most of the scenarios I’ve seen, working with a debt consolidation company that negotiates lower interest rates and payments seem to work best.

6 Responses to Getting Personal Debt Under Control

  1. Sometimes I hate this kind of thing. Someone tries to get in charge of their money and so they cancel some credit cards only to be blasted with a bad credit score due to a changed credit ratio or whatever. It’s a ridiciulous system, credit ratings. Ugh.

  2. Like I’ve shared with you before Jason I used debt consolidation in the past. If you find a reputable organization that’ll work with you it can be a lifesaver. I know it’s a huge part of the reason why I am debt free today.

  3. Jason @ WSL says:

    @John – I also used it and I’m with you that finding a reputable company is the most important step. The good thing is there are quite a few decent ones out there, but consumers just have to be careful and do their research before-hand.

  4. One of the hardest things that I find people struggle with is spending less than they earn. If they consolidate their debt the company they work for will have to work real hard to make the person understand that but then again you can’t make anyone do anything. Live and learn sometimes.

  5. Matt says:

    Perhaps a better way would be to cut the card up? I;ve done this, cut the card up and you can;t use it even if the account IS still open. ALthough, it can be tempting when your card expires and they send you a new one…

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