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CONSOLIDATING DEBT

Debt consolidation may be one way for you to get out from under multiple debts. There are four methods of consolidating debt:

(1) Credit card transfers
One strategy is research credit companies that offer a zero-percent or low interest credit card and then transfer the balances on your high-interest accounts to that card. However, zero percent rates are usually offered only to those borrowers with excellent credit.

Also, you must pay off your outstanding debt within the time frame that the low introductory offer is effective, or else run the risk of ending up in the same situation as before. In addition, the low rate only lasts if payments are made on time. One late payment and the credit card company will raise the rate.

(2) Refinancing home loans and home equity loans/lines
Refinancing your existing home loan or obtaining a new home equity loan or line of credit can be an effective debt consolidation strategy. Home equity loans are relatively inexpensive, fairly easy to obtain and they usually offer a tax deduction for the interest portion of the loan. Still, borrowers need to be cautious since they are borrowing against their homes. As in all techniques for debt consolidation, this approach is truly effective if you exercise prudence and discipline in the management of your finances.

(3) Debt consolidation loans
Convenience is the main appeal of consolidation loans. Instead of paying 10 or 15 different creditors, each charging different rates at different times of the month, you take out one big loan and pay off all those accounts. Then you make a single payment on that loan once a month.

Before you sign on the dotted line, you need to be sure that the costs and interest rate of the new consolidated loan will truly be less than what you're already paying to various creditors. For many consolidation-loan candidates, their current credit woes mean they won't get the lowest-available interest rate. Plus, when there is nothing to secure the loan (such as your home), you can expect the lender to bump up the rate.

You should calculate interest and fees on all your existing accounts, and then compare those amounts with the consolidation loan figures to make sure it truly is a good choice.

(4) Debt management plans/programs.
Debt management programs (DMPs) are a tool whereby the debt management agency acts as the sole point of contact, taking your monthly lump sum payment and distributing it to your creditors until the accounts stand at zero. Then they close those accounts.

Borrowers should be wary when approaching debt management and debt settlement companies. Many can offer poor service charging large fees. A DMP is not a good choice if you already have an excellent credit score, since its reduced payment plan will probably show up as a mark against you on your credit report. (Even though your creditor agreed to the reduced payment, you technically did not pay your account as called for in your original credit agreement.)

But if you just can't get a handle on your bills by yourself, you might consider credit counseling and forgo the debt management program. Credit counseling companies educate consumers and can help with your spending habits and the debt dependency in which it sometimes results.

Ultimately, debt consolidation is not a quick fix. In fact, it’s more like going on a long-term healthy diet. Like a diet, no one can do it for you and it takes both time and discipline to be successful. Otherwise, you can end up at the same weight or high debt load that you had before.