Debt Consolidation FAQ

If I'm replacing my credit card debt with more debt, how will that help my credit?

By paying off all of your revolving credit accounts with one loan, you can beat debt by effectively converting your monthly bills to one convenient, less expensive, payment. Your credit report will show that your former accounts are paid in full, and because your new payment more easily fits into your budget and you don't have several due dates to keep track of, you'll likely have an easier time staying current on your debt consolidation loan.

As much as I'd love to beat debt and close most of my credit card accounts, I've heard that closing several accounts doesn't look good on a credit report. Is this true?

That's a common myth. While creditors might be concerned when a lender closes your account, there are no negative connotations involved with paying off an account and closing it yourself. And since your credit report indicates who closes each account, there shouldn't be a problem.

I've read a lot of articles about debt consolidation. Some talk about using the equity in my home to consolidate debt, while others say nothing about that. Do I need to be a homeowner to get a debt consolidation loan?

You don't need to prove ownership of anything to secure a debt consolidation loan. The articles you're talking about were likely referring to home equity loans, which differ from debt consolidation loans. A home equity loan borrows against the portion of your house you've already paid for, allowing you to use the money for a variety of expenses, including debt consolidation. Because your house is used as collateral, borrowers might have a slightly easier time qualifying for a home equity loan. Of course, the downside to that is if the borrower ever gets into financial trouble, the lender can take the house. By getting a debt consolidation loan, a borrower can beat debt without putting any of his or her property at risk.

How would paying off a credit card save me money? If I stopped using it regularly, wouldn't paying off the balance be the same whether I paid it now or over time?

Actually, the difference between paying off a credit card now and paying it off over time would be astronomical. A revolving credit account continually recalculates the interest, sometimes as often as every day, based on the balance and then charges just enough to cover that interest every month. So you can pay on the card for years and see little change in the balance. The only way to break the cycle and beat debt is to pay off the entire balance at once with a debt consolidation loan.

Everyone keeps saying to take advantage of the low interest rates while they last, but it seems like they've been saying that for quite some time now. How long do I really have before the interest rates go back up?

Nobody knows for sure. However, recent stabilizations in unemployment numbers and housing sales, along with predictions by economic forecasters, have suggested that the economy might be poised for a slow but steady comeback. And historically, when the economy's bad, rates are low; when it's good, rates are high. Given that information, it would probably be a good idea to beat debt with a debt consolidation loan as soon as possible.