What is debt consolidation?

Happy December! You can do your part supporting the economy by purchasing gifts and things nobody ever needs for people you tolerate. Then, you can stick it to the big corporations by filling a box with bricks and “returning” the gifts you receive. Win-Lose-Win. 

*I am kidding. That is fraud and illegal. Amazon, don’t ban me.

In one of our first newsletters, Mike talked about getting out of debt. As a quick review, there are three main strategies when you have multiple lines of high-interest debt:

1. Debt Avalanche - the fastest and cheapest method (IMO the best)

   1. Tackle your debt in order of highest interest rate to lowest rate with every dollar you can while still making all minimum payments. By going after the highest interest rate first, you ensure the cheapest total payoff.

2. Debt Snowball - the psychology game to keep you motivated

   1. Tackle your debt in order of smallest balance to highest balance with every dollar you can while still making all minimum payments. This gives you the motivation to keep going by eliminating one debt source ASAP.

3. Debt Lasso - consolidate to conquer

   1. Wrap up multiple lines of debt into one loan. This makes it easy to keep track and make payments but usually comes with some additional fees and considerations. 

Debt consolidation is the technical term of the debt lasso method. If you have multiple lines of high interest debt (credit cards, payday loans, cars, etc), you may be able to consolidate your debt into one location to simplify payments and tracking. This leads to one of my favorite “would you rather” questions; the same ones my dad cannot stand. 

Would you rather fight one horse-sized duck? Or 100 duck-sized horses? 

Personally, I would rather fight 100 duck-sized horses. I don’t think I could outrun them, but realistically, only ten would be able to fight me at a time. Their bites would hurt but not be game enders. On the other hand, one horse-sized duck could end me with a good strike. I would have to get close enough to fight, and that beak could break me. 

Debt consolidation is kind of the same way. Would you rather pay off ten, $2,000 credit card balances? Or one, $20,000 credit card balance?

If it’s all credit card debt, you may be able to open a new credit card that offers “no-fee” balance transfers and a 0% interest for the first couple months. However, the devil is in the details and the interest rate on a transferred balance may be higher after six months. 

If your debt is across multiple sources, you could take a debt consolidation loan to pay off all the balances, then pay off that one loan. Before going this route, you would want to make sure you know the true “payoff quote” for each of your loans. If you are paying off a car, there might be fees associated with paying off your balance early. If you don’t take that into consideration, you may be left with more debt than you started, yikes. 

If you have equity in your home, you could take a Home Equity Line of Credit (HELOC) to pay off other high interest debt. 

All of these methods have their downsides, from financing fees to credit score hits. You have to double check all the details to make sure it will actually cost you less money once it’s all done. 

So why would a company give more debt to someone with a lot of debt? I would love to say it’s because the banks want to help you get out of debt, but I can’t. High interest debt is profitable for banks. If you are paying Bank of America, that means you are not paying CitiBank! They want your money. So, they will give you a big chunk today (of depositors’ money), and then you will pay them a little chunk for a long, long time. 

Debt consolidation can be a really useful tool to lower the stress associated with multiple lines of credit. The details can be killer though. Make sure you read through all the fees and conditions before opening a new credit card or loan. 

Most importantly, you should stop the problem at the source first. Stop using credit cards if you can’t pay them off in full every month. Exchange an expensive car for a 1998 Toyota Camry. Downsize your home or apartment if the monthly payment is too high. If your financial boat is sinking, plug the holes first before bailing out the water. 

Lastly, if 100 duck-sized horses start attacking you: 1. Stay on your feet. If they get you to the ground, you’re toast. 2. Pick one up by the hind legs and use it as a weapon. This sounds brutal, but hey, they started it. 3. Record it. There are many internet forums that want to see the results. 

What We’re Watching:

Netflix: Martha. This Martha Stewart documentary is, according to Jules, a wild ride. From felon to television personality, she’s got quite the resume. I’ve got it on my “things to do on a plane” list. You should add it also.

Debrief on Deck

Speaking of banks that want your money, next week we are going to talk about Bank of America. Its founding, 2008 saving, and current status in the world.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on Instagram.

Until then, stay the course.

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