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Debt Free Step Four: Negotiate and Consolidate Your Debt

With balance transfer credit card offers piling up on the your table, debt consolidation can be tempting. But it’s not always the easy solution creditors market it to be.

Only after you have gotten in the habit of making regular increased payments towards your debt should you begin exploring other debt elimination tricks like debt negotiation and debt consolidation. All of the shortcuts in the world can’t help you get out of debt if you do not first develop the self-discipline to live within your means and devote additional income to paying down your debt.

This next part of my Debt Free in Seven Steps system is to find these short cuts that can help you get out of debt faster–and for less.

Step Four: Negotiate interest rate reductions from your creditors and/or consolidate balances in lower rate accounts.

First, call your card companies!
The first step anybody with credit cards should take is to request an interest rate reduction from your credit card companies. Why in the world would a credit card lower my interest rate? Four times out of five they might not. But if you ask, and ask again, they will likely give you a rate cut to keep you as a customer. If you haven’t noticed your mail box overflowing with “pre-approved credit card offers”, the consumer lending industry is lucrative but it’s also competitive.

Call your credit card’s 800-number and just ask to have a lower interest rate. Tell them you received balance transfer offers and will take your balance elsewhere if you can’t get a better rate. If they say no, ask to speak with a supervisor. If that proves fruitless, call back again tomorrow. Most credit cards will eventually lower your rate if you harass them, and it’s a move that will save you hundreds if not thousands of dollars.

This debt negotiation tactic will work best if you are in good standing and don’t have a number of late payments in the last year. If, however, you are being charged a higher interest rate or “penalty APR” because of your late payments and are now paying on time, call and request a return to your usual rate. Most creditors will not refuse such a request from somebody who is paying in good faith.

Balance transfers
If your credit score is good, you may be able to qualify for one or more credit cards with 0% balance transfer offers for a year. Compare and apply for balance transfer credit cards and move high-rate balances onto the 0% card. Do NOT, however, use the new cards—or the old ones for that matter—to make new charges. Cut ‘em up. The point of getting the new credit cards is only to save money on getting out of debt.

Debt consolidation
Another tool at some debtors’ disposal is debt consolidation, or the process of moving two or more credit cards or loans into a new loan, usually with more favorable terms like a lower interest rate. Mortgage lenders frequently advertise mortgage refinancing and home equity lines of credit as debt consolidation options, and introductory-rate credit cards make balance transfers a tempting debt consolidation option.

Be careful, however, with debt consolidation. Most people are in debt because at some point they spent beyond their means. Consolidating debt frees up credit and lowers the minimum debt payment you make each month, making it tempting to loosen your spending belt a bit. A few months of a dollar hear and two dollars here can add up quickly to yet another ugly debt.

If you decide to consolidate debts into a credit card balance transfer, for example, cut up your old credit cards and do not activate the new card—use it only to carry the transferred balance. The less available credit you have at your disposal, the less likely you are to backtrack.

Moving on…
Once you have taken advantage of any debt negotiation or debt consolidation techniques, it’s time to move onto Step Five: Automate Your Debt Payments. Or, check out all the articles in my Debt Free in Seven Steps system.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.