Your habits need to change

Walter wants to use a credit consolidation option to help pay down $40,000 in debt. Dave advises against this, saying the biggest problems Walter faces are his own habits and behaviors.

QUESTION: Walter lives in Canada, and he has $40,000 in debt. He asks Dave if using a zero-percent credit consolidation option would hurt him when it comes to a mortgage in the future. Dave explains why using debt consolidation companies is a bad idea.

ANSWER: Typically in the states, unless you’re talking about resetting the loan and getting a new loan, using debt consolidation companies that pay the bill and give you a lower interest rate will be treated like a Chapter 13 bankruptcy. I’m not sure how it would be treated in Canada, but it does damage your credit.

Now, it’s okay if you can restructure the loan, and borrow somewhere else at a lower interest rate. But that’s really not your problem. Even if you dropped your interest rate on $40,000 by 10 percent — went from 18 percent to eight percent interest — that’s $4,000 a year. Four thousand dollars a year doesn’t solve a $40,000 problem. My point is that the interest rate is a very small part of the issue. The biggest part is getting on a plan, getting mad, and sacrificing a lot of stuff so you can attack the debt with a vengeance, and make it go away quickly.

Getting lower interest rates, if you’ve got a lot of high interest rate stuff, is fine. It doesn’t really fix the problem, though, because your habits haven’t changed.