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In too deep: Americans have nearly $800 billion in credit card debt. Is debt consolidation the answer to your financial woes?

OVER THE LAST DECADE, LARRY Williams, 46, and his family have lived a good life on a middle-class budget, They've vacationed in hot spots across the country and bought shiny, new cars and matching appliances for their two-story colonial in a private New York community. The only problem is they purchased these goods and luxuries courtesy of American Express, Visa, Sears, and other lenders. A lead agent at an investigative firm, Williams figured he could handle the spending splurges since he earns a decent salary. But somewhere along the way, his finances started spiraling out of control and by the time he sought help, he had more than $50,000 in credit card debt.

"This was years of accumulation of debt. For some time, I ignored the problem. In January 2005, I finally concluded that I needed help," says Williams. "I considered bankruptcy, but that was not a viable option for me. I figured, since I bought the goods and used them, the right thing for me to do is pay for them. I just needed to decide how I would get out of debt."

After reaching this point, the first thought for many Americans is to file for bankruptcy. In fact, more than 1.5 million individuals filed for bankruptcy in 2004, according to Todd Mark, spokesman for Consumer Credit Counseling Service of Greater Atlanta (CCCS). More than 500,000 consumers filed for bankruptcy in the week prior to Oct. 17, 2005, when the new bankruptcy law went into effect. But with new laws making it more difficult to file for bankruptcy, consumers are scurrying toward other options. Debt consolidation is one of them. But is it for everyone? If a financial quandary has you in too deep, read on to understand precisely what debt consolidation means, the different ways to approach it, and whether it's the best solution for your financial woes.


Debt consolidation is a popular term marketed on television, radio, and in newspapers as a simpler, easier, less costly way to pay off your debts. "Simply stated, debt consolidation is taking several debts that you are paying monthly and converting them into one monthly payment of a lesser amount," says Norman H. Perlmutter, CPA, and former debt collection agency owner.

The reasons people find themselves in debt are endless. Some experience tragedies such as job loss or job reduction, incapacitating illness, divorce, or death, forcing them down a path of financial dependence on credit cards. Others mismanage their incomes and live beyond their means to keep up with the Joneses. At the end of the month, they can't pay their debts.

Maria Arvelo, 31, thinks she's pinpointed the reason for being more than $130,000 in debt with credit cards, doctors' bills, and, student loans. Arvelo, director of development at Fort Valley State University in Fort Valley, Georgia, attended private and out-of-state institutions for higher learning such as Saint Augustine's College in Raleigh, North Carolina; Old Dominion University in Norfolk, Virginia; and Clark Atlanta University, where she's earning her doctorate. At those colleges, she was targeted with credit card offers she gladly accepted.

"In my middle-class family, growing up in Columbia, South Carolina, we didn't discuss things like the importance of paying bills on time, the dangers of credit card debt, and making sure I didn't get too many student loans. We didn't discuss going to public schools as opposed to expensive private schools," says Arvelo. "I've made some really bad choices, and I'm trying to revamp my life. I think debt consolidation will allow me to focus on stability and financial freedom."

After she gets her doctorate, Arvelo will consolidate all of her student loans and then work to pay down her credit card debt. Debt consolidation is attractive to consumers like Arvelo and Williams, because it offers longer payout terms, lower interest rates, and, at times, a partial reduction of the debt principal or a tax write-off. Before you make a decision about the best way to get out of debt, let's review the options.


Credit counseling agencies offer solutions and obtain reductions in interest rates. Williams reached out to CCCS of Greater Atlanta ( "I pay CCCS a $50 fee per month. When I look at what I save, it is well worth it," says Williams, who had been paying $1,000 more per month in finance charges, late payment charges, over-the-limit charges, and automatic default charges.

In arrears for the last seven years, Williams began a debt consolidation program in April 2005 and will complete it in five years. In exchange for destroying all of his credit cards and committing to a payment plan, Williams negotiated a plan with CCCS to erase late fees, over-the-limit fees, and no-payment fees, and substantially reduced all of his interest rates. They also worked aggressively to make the phone calls from creditors cease. Although he won't disclose exactly how much he pays monthly in addition to the $50 fee, Williams has paid off approximately 10% to 15% of his total balance.

"CCCS provides free credit, budget, and housing counseling. After looking at income, expenses, and debts and helping the client formulate a monthly budget, a counselor may recommend a debt management plan," says Sue Hunt, certified counselor and counseling manager of CCCS of Atlanta. "This gives the client some breathing room to work to pay off the debt, usually in three to five years."

However, many credit counseling organizations are paid by creditors to collect from you. In an industry that has very little regulation, there's room for unscrupulous companies to prey upon your vulnerability. This has been so pervasive that the U.S. Senate Permanent Subcommittee on Investigations released a report April 13, 2005, that examined the credit counseling industry and exposed abusive practices committed by certain credit counseling agencies. Likewise, on Oct. 14, 2003, the Internal Revenue Service, Federal Trade Commission, and state regulators issued a consumer alert for those seeking assistance from tax-exempt credit counseling agencies. To alleviate any difficulty, try going with larger, more reputable companies such as Consolidated Credit Counseling Services ( and the National Foundation for Credit Counseling (

Debt consolidation loans, considered the only true form of debt consolidation, are offered by a bank or through a balance transfer offered by a credit card company. The benefits are significantly lower interest rates and better payment terms. Also, the debt remains unsecured, meaning that you don't have to put up any collateral, such as your home.

However, there is a downside. "The interest trade-off may be too high, creditors may have unreasonable discretion to increase rates if you have one late payment or are over the limit, and there's always the temptation to borrow unused credit," says Perlmutter. "If you play by their rules, this type of debt consolidation can be beneficial; maintain perfect credit, pay bills on time monthly, don't go over the limit, and don't use credit cards you've paid off."

Equity financing, on the other hand, pays off your debts using a loan against the value of your home. This method offers lower monthly payments because of the lower interest rate and longer payout terms. If your current home is worth $200,000, for example, and you have $50,000 in equity, you can do one of two things--refinance or take out a second mortgage. It is only a good idea to refinance if the new interest rate will be substantially Iower than your current one. You can pay off all of your credit card debt and other bills and have the added bonus of saving more money since mortgages are tax-deductible. But there is a significant drawback. You are trading unsecured debt for secured debt. Credit card companies can do little more than report your payment history to credit reporting agencies, resulting in a negative credit history. However, the mortgage company can--and will--take your home.

So is it a good idea to pull cash out of a home to pay off debt? "Yes, if you save money. Just because you get a write-off, it doesn't mean you save money. A 0% credit card rate is far better than a 12% home equity loan. You must do the math," says Scott Bilker, founder of and author of Credit Card and Debt Management (Press One Pub; $19.95). "To find the comparable rate for a non-tax break offer, simply subtract your tax bracket from one and multiply it by the rate [of the second mortgage]."


No debt consolidation strategy will succeed until you deal with the causes of your debt. "The first stage of problem debt is denial. If the debt stems from fundamental underlying issues, like living beyond your means, then debt consolidation can be the worst choice," cautions Steve Rhode, president and co-founder of "I have seen many people consolidate their debt only to wind up in trouble again. You can wind up in deeper trouble if the underlying issues are not addressed."

If you find yourself in this situation, consider seeking counseling from a certified therapist or psychologist who specializes in behavioral finance--the application of psychology principles to managing and understanding of money. Kathleen Gurney financial psychologist and author of Your Money Personality: What It Is and How You Can Profit from It (Doubleday; $37.98), developed the Moneymax Financial Personality Profile. The questionnaire determines attitudes on 13 financial traits that influence money behavior and investment decisions. It helps individuals change self-sabotaging money styles into styles that are more productive and enriching. To discover your money personality with this profile, go to

While these forms of debt consolidation may work for some, they may not work for you. In that case, there are viable options you can exercise to help protect your credit rating. If your credit is good, call your credit card companies and ask that they lower your interest rates, set all of your due dates to the same day, and waive any over-the-limit or past-due fees. Then aggressively pay off your debt. If you are behind in payments to your creditors, consider negotiating a workout arrangement, which is an installment agreement with one or more creditors for settling the debt for less than you owe.

"People consolidate their debt because of fear, panic, stress, anxiety, and internal and external pressure. Rather than look for in-depth solutions, consumers in crisis gravitate toward the perceived easiest path to eliminate the problem," says Rhode. "The most obvious alternative to debt consolidation is to repay the bills in an orderly fashion."

6 HELPFUL WEBSITES WHEN CONSIDERING DEBT CONSOLIDATION National Foundation for Credit Counseling Consumer Credit Counseling Service of Greater Atlanta Federal Trade Commission Better Business Bureau


Talk Your Way Out of Credit Card Debt! By Scott Bilker

How To Settle Your Debts Without Committing By Norman H. Pertmutter

Everything You Wanted To know About Credit But Were Too Afraid To Ask By Renee D. Crenshaw and Anthony B. Miles

The Money Book for the Young Fabulous and Broke By Suze Orman

7 Money Mantras For A Richer Life By Michelle Singletary

Your Credit Score; How to Fix Improve and Protect the 3-Digit Number That Shames Your Financial Future By Liz Pulliam-Weston

100 Questions You Should Ask About Your Personal Finances By Ilyce R. Glink

Credit Repair By Robin Leonard

Zero Debt The Ultknate Guide to Financial Freedom By Lynnette Khalfani

How To Get Out of Debt. Stay Out of Debt and Live Prosperously By Jerrold Mundis

COPYRIGHT 2006 Earl G. Graves Publishing Co., Inc.
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Title Annotation:economic conditions
Author:Royal, Leslie E.
Publication:Black Enterprise
Geographic Code:1USA
Date:Mar 1, 2006
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