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Debt in America is skyrocketing. Recent studies reveal:

• 40% of United States families spend more than they earn.
• Almost 1 out of every 100 households in the United States will file for bankruptcy.
• 1.3 billion credits cards circulate in the United States .
• The average American family is paying about $1,100 each year in interest on credit card debt.

Television commercials and newspaper and magazine advertisements promise quick fixes with debt consolidation loans. Consumers should beware and do their homework before signing anything. According to the Cambridge Credit Corporation, “a debt consolidation loan is a temporary quick fix to your debt problems” and “not treating the cause of the debt . . . merely relieving the symptoms.” Research indicates that "70% of American Citizens who take out home equity or debt consolidation loans to pay off their existing credit card debt end up with similar debt loads (if not higher) almost within 2 years.”

There are three types of debt consolidation:

1. Home equity loans.
2. Zero-percent credit cards.
3. Debt consolidation loans.

Home Equity Loans

Home equity loans are loans that use your home as collateral.

Reasons to get a home equity loan:

• Low interest rates.
• Tax deductible (could be limited in some situations – check with a tax advisor).

Reasons not to get a home equity loan:

• If a borrower defaults on a loan, they could lose their home !
• Origination fees.
• Cost of an appraisal.
• Cost of title insurance.
• Lender fees.

Zero-Percent Credit Card

A zero-percent credit card is a credit card that does not charge the user any interest. They are only offered to borrowers who do not own their own home, and who have good credit scores and a good credit history.

Reasons to get a zero-percent credit card:

• No interest charges for up to a year. All monthly payments go to pay down debt.

Reasons not to get a zero-percent credit card:

• The zero-percent rate only lasts a short time and then jumps to a higher rate. Borrowers need to determine that the new rate will not be higher than the current market rates.
• If the borrower misses a payment, they could lose the zero-percent rate. Credit card companies will often increase rates after even just one missed payment.
• If the borrower opens new zero-percent accounts every 6 months, it could negatively affect their credit rating.

Debt Consolidation Loan

A debt consolidation loan is an unsecured loan (no collateral is used to secure the loan) used to pay off other creditors.

Reasons to take out a debt consolidation loan:

• One creditor instead of several creditors.
• Convenience.
• You don't have to risk your home to secure the loan.

Reasons not to take out a debt consolidation loan:

• Higher interest rate because it is an unsecured loan.
• Closing and financing costs.

Credit Counseling

Before a consumer decides to consolidate debt with a loan or switch credit cards, they should consider credit counseling. According to the National Foundation for Credit Counseling (NFCC), certified credit counselors provide free or low cost confidential services to consumers including:

• Advice on how to manage money.
• Suggestions for solutions to current financial problems.
• Development of a personalized plan to prevent future problems.

NFCC members, often known as “Consumer Credit Counseling Service (CCCS), can be accessed in communities nationwide. To locate a Consumer Credit Counseling Service office, please call 1-800-388-2227 or visit the NFCC website at www.nfcc.org .

For more information, please visit www.ohiotreasurer.gov or call us at 1-800-228-1102.

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