Debt consolidation

0:01So let's talk a little bit about debt consolidation. And this is the idea, and I'll give an example in a second, that if you have multiple debts, especially ones at higher interest rates, you can consolidate them into one loan that ideally has a lower interest rate and it also simplifies your life.

0:20So let's give an example. Let's say you have one credit card where you owe $5,000 and the interest rate right now on that, that's an @ sign over there, is 25%. Let's say credit card two, you owe $7,000, and that has an interest rate of 20%. And let's say... Actually, let me just stay there for now with the credit cards.

0:49So, you have a couple of options. One potential option, most credit card companies like it when you transfer balances onto their cards, onto their accounts because then they collect this very high interest that they typically get on credit cards. So one possibility is, credit card two might say, "Hey, we like it when you transfer balances over."

1:10So there's a world where you go to just having credit card two, you transfer this balance from credit card one onto credit card two, and now on credit card two, you owe $12,000 at 20%. Now why is that better? Well, your interest rate came down for this $5,000, and now you have one bill to worry about.

1:32Another way you could do it is, a lot of credit card companies give offers for transferring balances and they'll often give a very low introductory rate, oftentimes 0%. And so you might say, all right, maybe I transfer these all into credit card three. And when we say transfer, essentially in this example I just gave, credit card two would pay the $5,000 to credit card one, and now you owe credit card two that extra 5,000.

1:59So if we transferred to credit card three that has a 0% six month introductory rate, then you now owe $12,000 on credit card three, and you're done, and this is at 0% for six months. So this seems pretty ideal. You've consolidated, you only have one thing to worry about, and you're only paying 0%.

2:26But as I keep saying, this is only for six months or whatever the introductory period is. So you have to be very careful here. You don't wanna just look at what the introductory rate is, you wanna see what does that rate become afterwards. If afterwards that rate is no worse than say 20%, then this is probably a good thing because you're no worse than paying 20%, you've consolidated that 25% down to 20%.

2:49And for six months you're not paying anything, so that could be good, but if after six months that rate is 25%, then this wouldn't be a good thing because then you're actually paying more interest in the long run on that $7,000. The only way that that would make sense if after the six month introductory period you have a high interest rate, is if you felt very, very, very confident that you are able to pay down or pay off, ideally this $12,000 in that six months.

3:17Maybe you're getting a bonus from work or some other types of payments are going to be coming in, some other type of money is coming in, and then it might make sense. But you have to be very, very careful when you're playing a timing game like that. And it's always good to be conservative.

3:30Now, a typical source of consolidation is if you own a house and you have some home equity on that house, which means that the house is worth more than what you owe on it, the difference is your home equity that many banks will let you borrow from. And those interest rates tend to be a lot lower.

3:49Now you might say, why are they so much lower? Well, if you don't pay them back, they're gonna take your house. So you have to be very careful. In the credit card case, it's just really going to hurt your credit if you don't pay it back. It's unsecured. While on a house, it's secured if it's a home equity loan.

4:03But let's say you are able to take out a home equity loan, home equity loan for $12,000, and these interest rates could be a lot lower. It could be at 7%. And so then you could pay off your credit cards and now you owe $12,000 at a much lower interest rate. This can be a good idea, but remember, make sure you can pay this off 'cause it's going to be bad news.

4:29You do not wanna lose your house if you become delinquent on the home equity loan payments or on your mortgage payments. But this is all the essence of what debt consolidation is, combining multiple debts into fewer debts, oftentimes one, and ideally lowering your interest rate and simplifying your life.

4:49The other thing to worry about, or at least be thoughtful of, is things like, okay, am I securing it with more things in order to get the lower interest rate? That could be okay, but just have eyes wide open. And oftentimes, let's say you're consolidating a subsidized loan or a government loan and say, for student loans, and you're paying it off with some other type of private loan, you might lose some benefits or rights in doing that.

5:14So just be very conscientious of what you're giving up. It isn't always just about the interest rate or just about the simplification.