Everyone wants to know whether or not to consolidate their consumer debt onto their mortgage. Well, it depends on whether you’re doing it to reduce your interest costs, or to buy room on your credit card so you can keep shopping!

R wrote:

When purchasing our home four years ago, we decided to get a bridging loan (I still don’t understand how it works). But the person at the bank also suggested an Equity Line of Credit, amalgamating our car loans while saving on monthly interest etc, because we were richer than we thought.

To our dismay and four years later we are still paying off this equity loan. We are now at 26,000 (down from 56,000) – We increased our payment to 1,500 a month, but I am so fed up of paying this money, because its 1,500 we could use on other things, like vacations or retirement. I am wondering, when our mortgage comes up for renewal (May 2010) we would then owe around 12,000 on the Equity Loan. Do I continue to keep paying it off monthly or should I add this money to our mortgage just to get rid of it. Right now we have a variable mortgage at 2.25 %interest. I am now 50 years of age, and really want to get our mortgage paid off. So I am not sure if adding the left over from the Equity Loan to our mortgage is the right thing to do. We have another 10 years on the mortgage.

R, sorry you got suckered. No one is richer than they think, but it sure is a great way to convince people to borrow more money, isn’t it? If your mortgage rate is lower than the equity loan rate, consolidate to lower your costs. But don’t reduce your payment amount. Slap as much on the mortgage as you were paying for debt and mortgage payments together and you’ll not only save money, you won’t add to the length of your mortgage.

K wrote:

I have $170,000 equity in my house, but have $45,000 in credit card debt. Question: Should I apply for a loan to clear the cc debt all at once (using home equity as collateral) or just keep paying it off as agressivly as possible (currently paying around $1000 a month)? Interest rate on my 5 credit cards varies from 28% to 5%. My net monthly income is $4950. My mortgage payment is $900/month (variable) I am a single parent of one child.

K, with such high interest rates, it makes sense to consolidate on your mortgage to save on interest providing you put away all forms of credit, learn to live on your current income, and continue to make extra payments against your mortgage to offset the consumer debt you stuck on there. Stick with a payment of $1900 a month and you should be fine over the long haul.

Maureen wrote: (I’ve summarized)

I wonder what would happen if for a couple of years the interest rate on all loans, mortgages, lines of credit and credit card debt was reduced for everyone. For example – 5% on $1000 of debt is $50. 19% on $1000 of debt is $190. Believe me, if that $140 dollars (multiplied by all the debt in North America) was still in our hands we (the millions of tax payers) could really stimulate the economy, create jobs and businesses and/or stave off foreclosure and bankruptcy. And the lenders would still be getting something – which is a lot better than the nothing so many can no longer pay. Would this not give many the breathing space that is needed to stave off more foreclosures and bankruptcies? Would this not act as a grass roots stimulus package instead of robbing from the tax base and our children’s future? I do know what an enormous difference it made to our lives when we were able to renegotiate all of our credit card debt down to 5% interest a few years ago. We are debt free and have some savings for the first time ever. Multiply what we were able to do by all the people who are in the same situation that we were in and I think we would see some real change. I honestly think that we the people could do a much better job of rebuilding our lives and the economy if just given a break.

Maureen, you’re very right when you say that a significant reduction in interest rates would help people not only get out of debt but create enough cash flow to help stimulate the economy. I received an email the other day from someone who tried to consolidate all their debt with one of our biggest banks only to be offered an interest rate of 16% — this when prime is at 0.5%. It is frustrating to watch. I’ve actually blogged about the fact that I think there should be a sliding scale implemented… take a three year consolidation loan and watch your interest rate come down semi-annually if you keep your monthly payment plan. But it would take some imagination and a willingness not to walk lock-step with everyone else for this to happen. In the mean time, I hope people are learning the lesson that borrowing at any cost is NOT a good idea. Maybe there are enough lessons in these tough times to make people wake up. And maybe those companies that do right by their customers will be rewarded with loyal customers over the long term.

S wrote:

I know that everyone says going with a variable-rate mortgage is cheaper in the long run than going with a fixed-rate mortgage. But to be honest I’m scared to death that the rates are going up. I mean if they’re this low now isn’t up the only place left? So what should I do?

S, I think you answered your own question. You know what you want to do, but you just don’t want to look stupid doing it. Doing what’s right for you is never stupid. It may be fine for some to go with a variable rate if they have a high risk tolerance and are prepared to keep a keen eye on the mortgage marketplace. The reality is that the spread between fixed-rate and variable rate mortgages is pretty thin right now, with fixed-rates coming in at about 4% and variables hanging at about 3.3%. (FYI, lenders charge a premium on fixed mortgages because they have to accept the risk that rates might go up. When you choose a variable rate, there’s no risk to the lender so you get a better rate.) So the question is, are you willing to eat .7% higher cost to know for certain what your mortgage rate will be for the next five years?

You’d think that after all my nattering on about paying the lowest possible interest on your debt so you can get it paid off faster, that I’d be seeing fewer people with high-cost cards. Not so. With interest rates rising, credit rules tightening, and the world in turmoil, people seem desperate to get credit and are willing to pay anything. Witness the 36% consolidation loan I uncovered in one couple’s finances. Really? A consolidation loan at 36%. Why bother?

For those who have take my message to heart – and there have been plenty – but just don’t know how to go about negotiating with creditors, here are a few tips.

First, you have to have a pretty good credit record or be on the verge of bankruptcy to get anyone to listen to you. Why? No lender wants to lose a prime customer with a pristine credit history. But if your circumstances are dire, lenders are also willing to cut lots of slack in order to get a least a part of their money back. This is the tactic used by Debt Settlement organizations to get your credit bill cut in half.

Second, you must be very persistent. Very, very persistent.

Next, call the customer service department and asks for a lower rate. Your call will go something like this:

Hi, my name is Molly McGoo and I am a good customer, but I have received several offers in the mail from other credit card companies with lower interest rates recently. I want a lower rate on your card, or I’ll just have to cancel my card and switch to one of those less expensive companies.

or

Hi, my name is Molly McGoo and I have a really big problem. I have quite a few credit cards and I’ve been dumb enough to rack ‘em all up and now I can’t make the payments. I owe you $______________, but I owe about $25,000 in all, and if I can’t figure out how to deal with all of this, I’m going to have to go see a bankruptcy trustee. Is there anyway you can help me not do that?

Some lenders will give you a lower rate simply because you asked. Imagine that. Of course, others will say there’s nothing they can do. If you’re denied a rate reduction, don’t give up. Wait a couple of days and try again. You may reach a more cooperative customer service rep. If it doesn’t work on your second try, escalate the call.

Ask for a supervisor. Explain your situation again and then ask, “What can you do to help me out?” If he can’t do anything, ask for a manager.  If she can’t do anything either, keep escalating the call. You want to find the body that CAN do something.

If you have a good credit history, remind the guy you’re talking to that other card issuers want your business. Be polite. Stress how much you like your card. But be firm. You’re not going to settle for your crappy rate. You’ll move the business. They may reduce your rate on the spot. Or they may say they need to look into it and will get back to you. If they don’t, call again.

If you have a crappy credit history, remind the guy you’re talking to that you are desperate, that he is only one of many creditors you’re speaking with, and that if you can’t find a way out of this mess you’ve made of your financial life, then you’re willing to bite the bullet, declare bankruptcy and start fresh.

I’ve had couples negotiate up to 10% off their interest rates. Corrina of “Corrina & Jay” got her card company to waive all the interest accrued on her account for a set of cheques that would pay off the principal. And when a couple applied to their bank for a consolidation loan and were quoted a rate 7% higher than it should have been for their circumstances, I told them to tell the bank to shove it. They did. And they ended up with another financing alternative that was 7% cheaper.

Why would you pay even $10 more to a credit card company than you absolutely have to?

BTW: If anyone in the Stayner/Wasaga Beach/Collingwood area has started a Gail Club, I have someone who would like to join you. Let me know at getgvo@gmail.com and I’ll point her in your direction.