Is your Debt Load Threatening your Retirement?

Is your Debt Load Threatening your Retirement?

Perhaps never before in history have so many people been so deeply in debt as they reach retirement age. Compared to our parent’s generation, credit card debt is a new phenomenon. Increasing numbers of people in their 50’s and 60’s and even beyond are heavily laden with debt – debt that threatens their ability to enjoy their retirement.

All too often, trouble escalates and by the time a person realizes they have a problem the challenges of rectifying it can be daunting. Many North American’s live from pay check to pay check with little or no contingency fund. Tina was a successful business owner, who managed her debt well. However a sudden health problem made her unable to work and threatened her businesses very existence. Added to that, the demands of medical bills became her reality, accessibility to credit resulted in taking on debt that she was not able to repay. While many credit problems start with the assumption that income will continue to flow, others are caused by over spending all the way up to include shopaholics. It takes 30 years to pay off $1000 of credit card debt if you pay the minimum balance. Unfortunately when you receive an invitation to sign up for yet another credit card, it doesn’t come with a surgeon general’s warning “Debt may be hazardous to your health. Complications can lead to premature death.”

One of the fastest growing financial services in this decade is Debt Consolidation.

The purpose of this article is to shed some light on the realities of Credit Card Debt Consolidation.

What is Debt Consolidation?
Debt Consolidation offers borrowers the opportunity to regain control of their finances by speeding up repayment times. The prospect of being able to make progress and pay off seemingly insurmountable debt in only 3 or six years is very inviting to a borrower who has been struggling to stay ahead of minimum payments.

How does it work?
The debt consolidation company representative approaches the companies their client owes asking for the maximum possible rebate or lowest possible interest rate. When the lender is approached by the debt consolidation representative they know the borrower is in serious trouble and the danger of never seeing payment of the debt could become a reality, if they refuse to negotiate an easier repayment solution for the borrower. In the process the lenders become more aware of your entire financial picture and are motivated according to their fear of receiving less versus nothing.

A last ditch effort – Before the Debt Consolidation Company.

If debt management problems are making your life difficult, no matter how much of an adjustment it is, you may be one of those people who need to have your charge accounts deactivated. It may result in a long-term improvement in your stress level, your health and your relationship. However that being the case, take a serious look at your situation.

There are a few things you can do to regain control:

• Impose a spending freeze and only pay on existing debts
• Contact all your creditors and ask them to freeze your account – making it so you can pay but not charge. At the same time, ask them for some type of reduction in your interest rate. Remember, if you do this you need to do your math first. If you are in too deep to turn it around yourself – then you need to consider a debt consolidation company.
• If possible approach your bank for a line of credit and use the line of credit to pay off higher interest rate credit cards. This may not be as aggressive and will not clear your debt as quickly as a debt consolidation company, however it is a good approach if you address you debt issues soon enough and as long as lack of income is not a major contributor to your debt problems.
• If the bank refuses to exchange a lower interest rate line of credit to clear the credit card totals, it may be an alarm bell for you as it may indicate they believe you are too high risk even with a lower payment. It does put them in the position that the risk is no longer spread between a number of creditors. If they will not provide a line of credit. Pay minimum balances on lower interest debts and as much as possible on higher interest debts. It still requires a willingness to stop using credit and a self-imposed spending freeze.

Debt Consolidation Companies: Consumer Beware
Remember that the debt consolidation organization, often appearing like a non-profit organization (no cost to you) is really a business and they make money. The money they make is on the gap between the interest you end up paying when you accept their debt consolidation plan and the interest rate they get your lenders to agree to accept. While they need to be able to make money in order to survive, you must assess the benefits to you.

Know first and foremost – they will deactivate (take away or cut-up) every credit card account you have and you will not be opening any new credit card accounts with those companies or any other companies for a very long time. If you do choose to eventually re-establish credit history and or credit cards you will be starting with a secured credit card – much like a teenager with first time credit. While not as hard as re-establishing credit following a bankruptcy it promises to be like a drug addict and drug rehab. You are likely to go through some withdrawal pains. You, for perhaps the first time in your life, will be buying only those things you can pay for in full. Renting a car, or a hotel room may result in a challenge, if your new secured credit card is pushed too close to its limit with the pre-authorization these businesses require.

1. Make sure you are really saving money.
2. It is your responsibility to be sure the figures you are presented with are accurate and that the end result is a significant savings to you.
3. Ensure that you will be able to keep the repayment commitments required by the debt consolidation plan.
4. If you default or pay late, the interest rate negotiation is usually nullified and all the creditors will start collection action against you for the original amount plus late fees and/or interest…and the debt consolidation company will also be added to the list as they want to collect what they set out to earn from the transaction.
5. Be sure you are comfortable with the debt consolidation company. They have now come between you and the companies you owe. Your future relationships with those companies may be either improved or tarnished by the debt consolidation company. Think of the long term impact.
6. Keep your debt consolidation representative informed. While your debt relationship was previously spread between various companies – you can no longer juggle bills. There is one bill – and it must be paid.
7. Ensure that the debt consolidation company is going to report their monthly disbursements to your creditors to you. Make sure you monitor the monthly statements to ensure the creditor is waiving the late fee charges and in agreement with the reduced interest rates.
8. Make sure you are crystal clear about early repayment policies. If your financial situation improves, you want to be in a position where you can pay off the debt consolidation loan early. Most often variable rate debt consolidation loans allow this and fixed rate consolidation loans do not allow prepayment.

Resources

• USA –  Department of Justice Approved Credit Counseling Agencies
• Canada – Financial Consumer Agency of Canada, Tips and Links
• UK – ConumerDirect.gov.uk -debt advice and information