When is Zero Interest Too Much?

You get them, I get them, the whole world gets them … those enticing offers for new credit cards that come with a few magic checks. The offer sounds even more seductive. Use the magic checks to pay off debts and put them on this new card, which will only charge zero interest for the next six months.

Zero interest offers are also popular in the world of electronics or when you buy furniture. Buy this item and put it on credit, and you’ll pay zero interest for one year.

But these offers may not be good for your financial health and well-being! Why not, you think, what’s lower than zero? Well, nothing, but you need to read the fine print.

Many such offers impose a very specific time limit. There is literally a moment when the offer wears off. At that point, you need to know what happens with any balance on the statement.

You see, many of these offers say that if you owe anything — even a penny — on the day the offer expires, you then owe all of the interest at a normal rate that you would have owed had you financed the entire purchase from day one.

Now every offer is different, so you have to do some investigation, but I personally know of a couple that are set up this way. Here’s how it works. Let’s say you go to the store and charge $5,000 worth of new furniture on a zero-interest program. The fine print says you have to pay it off in one year. You dutifully make payments. But then some stuff comes up and you skip a couple of months. The bills come in but they always cheerfully tell you that you don’t have to pay at all that month. It makes it seem like payment is optional. On the one-year anniversary of your loan, you still owe $600. You figure, what’s the big deal? You can pay a little interest on the $600.

Then you find that you get hit for the interest on the full amount. Let’s say the company was charging 22% (a lot of zero-interest offers come from places that have high normal rates of interest) annually. That’s $1,100 in interest for the $5,000. The next bill you get is going to be not for $600 or $600 and change … it will be for $1,700 ($1,100 in interest plus the $600). Interest will then rack up after that.

Now let’s say you were smart and you bought $5,000 worth of merchandise on a zero-interest loan set up like that and on the one-year anniversary of the loan, your balance was paid in full. You are done! And you’re also in the minority.

These credit offers are very smart in that they appeal to our overblown sense of financial self-confidence. Many people with a lot of debt figure they can pay things off easier and faster than they really can. Plus, the invoices that come in have a friendly, encouraging tone to them that urge you to relax and skip a few payments.

If you are very disciplined and don’t overdo it, you can use zero-interest loans to your advantage. The point is, they will end up costing you if you don’t have a very firm (and reasonable) exit strategy from the beginning.

Debt Consolidation Is and Ain’t

Despite the fact that more and more Americans need debt solutions, there is still a lot of confusion about what debt consolidation is and is not (or, as we say here in Texas, what it ain’t).

Debt consolidation is legal, ethical, and in the case of big business, pretty common practice. While there may be people selling scams associated with debt consolidation, as debt solutions go, it’s on the up and up. Debt consolidation involves re-packaging your debts in a way that gives you more favorable terms. Debt consolidation does not involve writing off debts or getting rid of debt. It can actually improve your credit score. Although you can do it through a professional organization or with a debt counselor, you can also do it on your own.

Debt settlement and debt negotiation are plans that involve reaching an agreement with your creditors that can reduce your debt. These typically involve outside organizations and, yes, there are scams associated with them. But there are also legit programs. When you settle your debt, you agree to pay a portion of what you owe in return for the debt being “settled.” You don’t get hounded by bill collectors. It will impact your credit in a negative way.

Debt management typically refers to a program that you sign up for through a third party (often a company) where they “manage” your debt while you pay them. This may appeal to people who just want to hand off their credit problems to a third party, but this is a very dangerous field–in fact, more scams are probably in debt management than any other debt solution arena. But there are still companies who do this on the up-and-up. The idea is that they negotiate or settle your debts, manage your payments, and make life simple for you. It will hurt your credit.

Bankruptcy belongs on this list, although to me it is not really a debt solution as much as a “last resort” when your finances are totally on life support. If you have to file for bankruptcy, there is no shame in it. It’s legal (it’s guaranteed in the Constitution, no less) and it’s not unethical. The only thing is that it’s extreme. Bankruptcy protects you from creditors (in fact, if you get bill collectors hounding you when you’re in bankruptcy protection, you can call them cops on them) and it not only settles some of your debts, it writes other debts off. Literally makes them go away! The bad news with bankruptcy protection is that it ruins your credit for seven years and it is terribly intrusive. Bankruptcy involves having a lawyer and going to court. The judge then has a lot of say in terms of what you have to do and can order you to sell all sorts of things as part of the terms of your bankruptcy.

Which solution is best? That depends on your financial problems, your personality, what you want to get out of the debt solution, how much you owe, the rules in your state (bankruptcy laws, in particular, vary by state), and even what you qualify for. By far the best solution is debt consolidation if you’re disciplined, if your debts are suitable for it, and if you can qualify.

Cut up? Freeze?

Today I heard an interesting bit of consumer advice on TV. A guy on the Today Show was urging people not to cut up their credit cards since credit might get increasingly hard to come by.

Now at the same time, he advocated not using credit recklessly and doing everything possible to get spending in check. He said people should live within their means.

I agree with everything in the second part. And his idea about hanging on to your credit cards was based on the idea that we should all have a little credit cushion in reserve.

But what if you can’t stand to have a credit card around you without using it? I can’t stand to have too much chocolate near my desk without eating it. If you’re like that with credit, does it really make sense to hold on to a card that could be your undoing?

I have known people to freeze credit cards by literally placing them in water in the freezer. The idea is that you still have it but it’s such a major hassle to get to it that you won’t use it recklessly.

A less dramatic way to handle a credit card might be to store it in a safe deposit box at a bank (if you have one–or would be willing to get one–they are often pretty cheap and sometimes a bank will throw one in for free when you open a new account). The card stays dry and you preserve your dignity, but it’s still a hassle to get to the card.

The problem with retaining credit cards that tempt you is that the advice is predicated on the alarmist notion that credit won’t be available in the future. Is that true? I don’t know. I’ve never known the MasterCard or Visa people to be stingy about issuing cards, particularly to people with fairly decent credit. It seems unlikely that the problem facing most overextended Americans is that they won’t be able to get credit.

On the other hand, I do know for a fact that many people can’t resist abusing credit cards.

Debt Consolidation Information

So much financial information is sponsored by the very people trying to sell you financial products and services. This site is all information, they don’t sell anything.

 http://www.debt-consolidation-diva.com

Super Market Savings

This is a great video. It’s stuff we all know but how many times do we fall for it anyway?

Women and Debt Consolidation

Suze Orman was on the Today show today, talking a little bit about how otherwise smart, savvy, capable women are not always skilled at managing their money. That includes debt. Women, she said, tend to think about money in terms of giving it away rather than saving or investing it. She did not address debt, but it occurs to me that women are often way more comfortable with debt than they ought to be and way less comfortable with saving than they should be.

Since 40% of businesses in America are owned by women, women are in a good position to understand how to structure or arrange debt in the most advantageous ways.

A woman who owns her own home and has reasonably good credit is in a good position to consolidate her debt, providing she has a lot of debt at higher interest rates.

Debt Consolidation Disasters

Technorati Profile

Debt consolidation can be one of the best or worst things that happens in your financial life. There are a lot of companies that will tell you the sunny side. It is possible to restructure your debt and re-arrange your life in such a way that debt consoldiation makes perfect sense.

For the right people, it can be the best possible solution.

But what these companies don’t always like to share is that debt consolidation is not always possible (at least not in a sensible way) for some people. In fact, a lot of people. That’s right, a lot of people who could probably use debt consolidation can’t get it or can’t get it in a form that makes good financial sense.

If you own your own home and have pretty decent credit, debt consolidation is likely to be a good idea, particularly if you’re a penitent debtor who wants to clean up his or her act.

If you don’t own your own home but have pretty decent credit, a good job, and possibly even some collateral (a fat 401.k account, some property even if it’s not your home, etc.), you can probably do well with debt consolidation.

But a lot of people in dire financial straits do not own their own homes, do not own anything that lenders would consider of enough value to hold for collateral, and have pretty mangled credit.

If that last one is your profile, you might be able to qualify for debt consolidation, but it may not be a good idea. If you don’t own anything to use as collateral, the only way for you to get the money to consolidate your debts is to take out an unsecured loan. If you have crummy credit, your unsecured loan is going to come at a high interest rate.

If you just re-structure your debt but don’t reduce the interest on it, you won’t be any better off except you’ll have one payment to sweat each month instead of a dozen.

You may even find that consolidating your debt increases your interest rate, at least on some of the debt, and there’s no reason to go to all of that trouble to pay more than you already owe.

Talk to a credit counselor rather than just the person from the debt consolidation company or go to a trusted financial advisor. Debt consolidation is a great solution for some people! But you need to know if you’re one of them.