Consolidation of credit card debt

George_Storey

Advice sought as to how to consolidate credit card debts of £15000 accrued by my son. What is the best way to pay this sum?

Reaper

Start by reading some articles such as "Problem Debts" in the blue box above. However the basic principles include lowering the interest rate and paying off the most expensive debts first.

If your son still has a good credit rating then he may be able to switch the debt to lower interest cards. There are various 0% cards around but these take some discipline to keep switching to new deals, and will gradually make his credit rating worse due to the number of applications.

An alternative which might suit you better is a card offering a low "life of balance" interest rate. The best around currently is Texaco.

With both 0% and LOB cards it is very important not to mix everyday spending with the debt. As things seem to have got out of hand I suggest you cut up the cards as soon as they arrive. You don't need them to do the balance transfer.

If his credit rating is too poor to get new cards then you could look at loans but we wary of extending the term for the illusion of lower monthly payments - you will end up paying much more in the end. Also beware of those secured on your house. More links on all this in the article I mentioned earlier.

Pay the minimum amounts on all the cards, and then pay any extra on the one charging him the most interest.

Finally you might want to pop over to the "Wannabe Debt Free" for more advice.

Richie(UK)

Hi George,

Is this with just the one credit provider or with a number? If more than one, what are the rates of interest being charged on the respective cards?

Conventional wisdom in these situations is to concentrate on paying-off the debts attracting the highest rate of interest first, then against the next highest and so on. However, you should make sure that the minimum payments are still made on the other cards while you are clearing the high interest debt.

The phrasing of your query suggests that you are considering grouping together more than one debt via a loan or new credit card, presumably at a low rate of interest. This is a sensible approach if you (or your son) have the self-discipline to simply use this as a tool for clearing the debts. All too often people heave a sigh of relief that their problems are 'solved' and then return to the sort of behaviour that got them in debt in the first place. I don't mean for this to sound as if I am preaching. I just know from the actions of some of my friends and family that this sort of thing can easily happen. Don't let it happen to you!

Xbigman

Of biggest concern first is the question, can your son service the debt(s) IE make the minimum repayments? If so follow the advice already posted (pay highest APR's first / try to lower APR). If not go to the debt free wannabe board for advice and contact a debt councelling service.

I'm against consolidation in general in these circumstances. Primarily because your son (or anyone else) has run up credit cards once and is likely to do it again. Lots of people have, me included.
Regards



X

Clariman

To echo what others have said, there is a real danger that consolidation loans backfire and end up increasing the debt. A poll on another financial forum (The Motley Fool) whosed that 85% who consolidated ran up further debts (!), because the pressure was off.

http://boards.fool.co.uk/Message.asp?mid=7136305&view=results

The only way out of debt is to spend less than you earn and pay off the debt with the spare money. Consolidation loans don't reduce the debt, they merely move it around ... and often increase it as the borrower is tempted to borrow more so that they can have a holiday or a new car.

Consolidation loans can work but only if you take on board the tough message that you need to reduce your spending.