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WalletPrep worksheet · Debt

Is debt consolidation a good idea?

Name ____________________ Date __________

Key ideas

  1. Consolidation only saves money at a lower APR. Compare the new APR, with fees, to the rates you pay now. One payment is easier, but easier is not cheaper.
  2. Keep paying what you paid before. Priya keeps paying $450 a month on her 13% loan and is done in 32 months instead of 40.
  3. The old cards must stay paid off. If you run the cards back up, you have the loan payment and new card debt at the same time.

Vocabulary

APR
Annual percentage rate: the yearly cost of borrowing money, shown as a percentage. It is the number to compare on cards and loans.
Credit union
A not-for-profit financial cooperative owned by its members, offering checking, savings and loans much like a bank.
Balance transfer
Moving debt from one credit card to another, usually to get a low or 0% promotional APR for a set number of months.
Debt management plan
A repayment plan set up by a credit counseling agency, where you make one monthly deposit and the agency pays your unsecured debts, often at lower rates.
Home equity
The part of your home you own outright: its value minus what you still owe on the mortgage.
Hard inquiry
A credit check made when you apply for credit, like a card, loan or mortgage. It can lower your score a few points for a while.

Work it out

Priya has $12,000 on three cards at 27%, 24% and 21% APR, paying $450 a month in total. A credit union offers a 13% loan with no fee.

  1. Card A at 27%
  2. Card B at 24%
  3. Card C at 21%
  4. Total card debt
  5. Cards at $450/mo: months
  6. Interest on the cards
  7. Interest on 13% loan at $450/mo
  8. Interest saved
  9. Loan at $450/mo: months

Check yourself

  1. When is debt consolidation most likely to save you money?

    • A. When the new payment is lower
    • B. When the new APR is clearly lower and you stop adding debt
    • C. When you have more than three cards
    • D. When the new loan has a longer term

  2. You move $8,000 to a balance transfer card with a 4% fee. What is the fee?

    • A. $32
    • B. $80
    • C. $320
    • D. $400

  3. Who runs a debt management plan?

    • A. Your credit card company
    • B. A debt settlement company
    • C. A nonprofit credit counseling agency

Your turn

Make a list of every debt with its balance, APR and minimum payment. Add up the balances and payments, then prequalify for one consolidation loan and compare its APR to your highest card rates.

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Answer key

Is debt consolidation a good idea?

Work it out

  1. Card A at 27%$5,000
  2. Card B at 24%$4,500
  3. Card C at 21%$2,500
  4. Total card debt= $12,000
  5. Cards at $450/mo: months40
  6. Interest on the cards$5,599
  7. Interest on 13% loan at $450/mo− $2,239
  8. Interest saved= $3,360
  9. Loan at $450/mo: months32
  1. Paying $450 a month across the three cards, with extra going to the highest rate, Priya is debt-free in 40 months and pays $5,599 in interest.
  2. With the 13% loan and the same $450 a month, she is done in 32 months and pays $2,239 in interest.
  3. $5,599 − $2,239 = $3,360 saved, and she finishes 8 months sooner. A 3% fee would cost $360, which still leaves about $3,000 saved.

Check yourself

  1. B. When the new APR is clearly lower and you stop adding debt Savings come from a lower interest rate. A lower payment or a longer term can actually raise the total you pay.
  2. C. $320 $8,000 × 4% = $320. Count that fee against the interest you expect to save.
  3. C. A nonprofit credit counseling agency A nonprofit credit counselor sets up the plan, asks your creditors for lower rates, and takes one monthly payment from you.