Debt consolidation loan for credit card debt

Millions of Americans have already been hit with increased credit card interest rates, but if your rates haven’t gone up yet, keep your eyes open; there’s probably a rate increase notice in the mail right now. It’s time to look into a debt consolidation loan.

Robert Manning, of the Washington Post, described credit cards as “yuppie food stamps;” a way of making ends meet. Right now, there are more than 700 million general purpose credit cards in use, and another 500 million retail store credit cards. Moreover, the average American household carries more than $10,000 in credit card debt. If a household happens to have credit cards at 18%, and makes minimum payments, it will take roughly 48 years to pay off the debts. Makes a debt consolidation loan sound sensible, right?

The average credit card rate is almost 14% this week, compared to six months ago when it was only 12%. However, for anyone who makes a late credit card payment, the rate can go as high as 30% or more. And, when interest rates get that high, a debt consolidation loan is just about the only way to get out from under credit card debt.

In the most recent Federal Reserve survey,
•    54% of senior bank loan officers said they had or would soon increase interest rates on credit cards held by consumers with good credit;
•    74% said they had, or will, increase rates for consumers with bad credit;
•    50% have or will but credit card limits; and,
•    40% said they have or will increase fees.

In a flash of creativity, they’ve even introduced a new fee—an inactivity fee for cardholders who pay off their accounts every month, or don’t use the card at all.

With a debt consolidation loan consumers have:
•    Lower interest rates—as low as 6.99% with good credit
•    Fixed interest rates
•    Consistent monthly payments
•    Faster payoff with savings of $1,000s in interest charges.

If you’re thinking about a debt consolidation loan, consider working with America One Unsecured, a loan consulting firm. They can help you learn more about your debt management options, and help you get the best rate a debt consolidation loan.

There's an old joke about a bar owner who bragged, "I opened this place 15 years ago with $78 in my pocket and boy, have we made progress! Today, I'm $298,000 in debt!

No doubt about it, debt can kill a small business, and seriously hurt your chances of reaching a finance company for a small business loan or other financing.

So here is an important thing to remember: Managing your debt load is just a piece of your overall debt puzzle. And recognizing red flags that indicate you are in trouble is another.

The bigger picture - how debt can impact your small business, the steps you can take to control debt, credit and borrowing issues, and who to go to for help if you need lending help - those are the underpinnings of the debt management structure.

It's also important to understand what debt management is not.

It's not, for example, another name for bankruptcy, although that's a common misnomer. Debt management doesn't mean you are in bankruptcy, or even on the way there. Bankruptcy is usually reserved for those who can't pay their debts and need legal protection. Debt management is reserved for those who can pay their debts, but need a little help in doing so.

Put it this way:

Bankruptcy is permanent and debt management is temporary.

Bankruptcy is for small business owners who don't even have enough cash on hand to pay for food and shelter. Debt management is for people who can't afford to pay all of their debt obligations.

Bankruptcy is for small businesses that have no money to pay creditors. Debt management is for people who have simply fallen behind on their payments to creditors.

Bankruptcy is for small business owners who can only afford to pay cents on the dollar on their debts. Debt management is for people who plan on paying 100% of their debts (with a potential break on interest, depending on the good graces of their creditors).

Bankruptcy is for small business owners who will soon lose some, most or all of their assets. Debt management is for people who don't lose assets.

Bankruptcy is for small business owners who may never get credit again. Debt management is for people who will get credit again.

In short, debt management is a viable alternative to bankruptcy for those entrepreneurs who can afford to meet their debt obligations. But note that, if a bleak debt situation goes largely ignored, the path from debt management to bankruptcy can be a short one.

As the revenues roll in from your burgeoning small business, it's tempting to use some of that cash to pay down your debts. But should you do that instead of investing the money for the future?

It's a fair question. In fact, Old King Solomon would have a difficult time deciding what to do.

But there is a guiding light out there in the economy that can help you decide -- interest rates. Why should it all come down to interest rates? In our dilemma here, it's a good idea to invest money if you can earn a higher interest rate than you are paying on your loans and debts. For example, if the interest rate on your small business loan is six percent and you invest in a mutual fund that promises a higher return, then your money is working harder and smarter for you as an investment.

That said, there's no guarantee that your mutual fund will even earn four percent next year. Heck, it could lose four percent.

So that's why I favor paying off your debt first. The interest rate fees you kill by paying off the loan alone make that strategy a savvy move. And being debt free is a small business owner's dream.

But I also come down on the side of practicality. If you insist on going the investor route, put the maximum you can in your self-employed retirement plan (SEP). In a word, SEP's are like a "Solo" 401(k) that cater specifically to small business owners and sole proprietors who want to save for retirement on a tax-advantaged basis. Since your retirement plan distributions are tax-deferred and come out of your own pocket as a gross, and not net, amount of your earnings, you'll hardly notice the money is missing.

It's simpy a matter of paying yourself first.

Come to think of it, paying yourself first is a good debt strategy of its own.

Here are some common financial “red flags” to look for in your busy life:

Your bank account is consistently overdrawn – If you keep getting those thin envelopes in the mail from your bank telling you that your checking account is overdrawn, it’s time to regroup and find out why you’re not keeping up. Tip: Ask your bank for overdraw protection against your checking account. For a few bucks each month, most banks will be happy to comply.

You are only able to make the minimum monthly payments on your credit cards -- A biggie.  If you can’t maintain a clean credit card bill each month then you’re staring at big trouble down the road. At 15 percent or so interest, card companies clean up when you only pay the bare minimum of your monthly bill. At those rates, that new jacket you bought for $80 three months ago can cost you $350 in a few months if you don’t pay your credit card bill in full. Tip: If you have multiple credit cards, cut all of them up save one. And only use that for emergencies.

You and your partner – if you have one -- are arguing about money – Money is an emotional issue; a power struggle sometimes between couples who usually have different ideas how cash should be handled. If you and your spouse or partners are haggling over bills more than usual, it’s probably because your bills are higher than usual. Tip: Agree on a budget and a spending allowance, if necessary. Then stick to it.

Your savings account is busted – Money experts agree that a savings reserve of six-months worth of your annual salary is mandatory to ride out rough economic times, like the loss of a job or a serious illness. If you don’t have any money at all in your savings account, it’s time to re-examine your budget and see where your money is going every month. Tip: When you get paid pay yourself first – meaning take 10 percent of your check out and stashing it in a savings or money market account.

You are juggling your monthly bill payments – If you’re applying selective reasoning to your monthly bill payments (“Hmmm – we’ll pay the phone bill this month, but not the dog walker”) then you’re in over your head financially. Tip: Lose the dog walker and any other luxury item on your “to pay” list. In tough times stick to the staples: home, heat, groceries, and electricity. You might not think about it, but 20 years ago, nobody had an Internet bill or a cell phone bill. But you probably do now.

If the first step in getting out of financial trouble is knowing that you’re in financial trouble, then the next step is to take action to get out of that trouble.

First item on the menu is to budget your expenses. We’ll talk about that extensively in this blog. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and health care) and optional expenses (such as entertainment and vacation travel). Again, make sure you stick to the plan.

Then try and cut out any unnecessary spending such as dining out too much and haunting Circuit City, E-Bay or Home Depot. Don’t be above clipping coupons or purchasing generic products at the supermarket. If you feel you can’t resist using your credit card switch to a bank debit card where money is immediately draw from your checking account to pay for a purchase.

If you have revolving credit card debt try using money from your savings account (normally they’re low-paying interest accounts) and use the cash to pay off your high-interest rate credit card bill.

Above all else, formulate a financial plan for the short and long term that includes a monthly budget and a savings account deposit goal of six months of your annual salary. Build a plan that will allow you to meet your basic life needs and one that will allow you to sleep at night. If you do create and maintain such a plan, you’ll be sleeping like a baby before you know it – and not a red flag in sight.

I believe the reason for people to get into serious debt situations is a lack of a real-world financial education. How to budget. How to live on a limited income. How to avoid credit troubles. Those kinds of things.

One solution to the problem – an easy one in my book – is to tally up your income and your outflows and see where you are, debt-wise. Another is to recognize how much debt is too much debt.

There are some other big, hard-to-miss red flags that tell you you’ve accumulated too much debt. Here are a few signs that you just might have too much debt:

If you haven’t got more than $10 in your savings account, and haven’t made a deposit to savings in months, you just might have too much debt.

If you’re in the habit of post-dating checks, you just might have too much debt.

If you habitually pay bills late, you just might have too much debt.

If you had to sell valuables, like a car, an old baseball card collection, or a family heirloom piece of jewelry, you just might have too much debt.

If you habitually pay the minimum on your credit card statement, you just might have too much debt.

If you’ve ever taken a cash advance on a credit card to pay off another bill, you just might have too much debt.

If you’re forever borrowing money off of family and friends, you just might have too much debt.

If it’s early in the calendar years and you already have a cash “crisis” you just might have too much debt.

If you’re surprised by the amount of money you owe on your credit card, or the low amount of money you have in your bank account, you just might have too much debt.

If you live from paycheck to paycheck, you just might have too much debt.

To figure out if you have too much debt, use one of the many online loan repayment and income estimation calculators available on the Web. They’ll help you calculate how much debt you have, how much you can afford to pay, and help you develop a budget or action plan to get out of debt.