One of the ways to manage your debt and then pay it down is with the help of debt consolidation. Debt consolidation is a process in which you combine your debts so that you make only one payment each month. In many cases, you can also consolidate your interest rate payments as well, leading to a lower overall interest charge.
With debt consolidation, it’s a little easier to manage your payments, and create a debt pay down plan that can help you get rid of your debt more efficiently.
But what is the best way to consolidate your debt? There are a number of different strategies you can use to reduce your debt. What you choose depends on your situation, and your needs. Here are 3 different approaches to consolidating debt:
1. Use Your Home
The home equity loan is one of the most popular ways to consolidate debt. This is because the value in your home is likely sufficient to pay off your smaller consumer loans. On top of that, the interest on a home equity loan is often tax-deductible, so while you are paying off your debt, you get a tax break on the interest you pay. It’s also possible to use a cash out refinance and then use the money you take out to pay off your debt.
You need to be careful with this approach, though, because you are essentially taking unsecured debt and securing it with your home. If you default on your home equity loan payments or refinance payments, you could lose your house.
2. Credit Card Balance Transfer
If you aren’t interested in using your home as collateral on your consumer debt, you can attempt a credit card balance transfer. If you are getting 0% APR offers (or even offers that allow you to transfer balances for 1.99% or 3.99%), take advantage of them. You can move your higher interest cards with smaller balances to the higher-limit cards. That way, more of your payment goes toward paying down the principal. You’ll be surprised at how fast you can demolish your debt when interest isn’t holding you back.
Just make sure you pay attention to the introductory period. After a certain period of time, the low rate disappears and you end up paying a high rate again. Look for a card with a longer intro period, and then do what you can to get rid of as much of debt as possible before the good rate expires.
Also, it’s also possible in some cases to get a lower-rate personal loan from your bank. If you can get a line of credit at 10%, that’s better than paying 15%, 17%, or 21% on your credit cards. Unfortunately, if you have poor credit, you’ll have a hard time getting a personal loan or line of credit from your financial institution.
Consider, too, your family and friends. They might be willing to give you a low-interest consolidation loan. Just be aware of the relationship strains that can arise from this strategy.
3. Debt Consolidation/Settlement Companies
There are companies that specialize in debt consolidation and settlement. With many of these programs, you make a monthly payment to the debt consolidation/settlement company and the money is held in an account. In the meantime, you are no longer making payments to your creditors. The debt company negotiates settlement with your creditors, and uses the money you contribute to pay off the accounts (usually for less than you currently owe).
However, this approach is often considered a last-ditch resort (well, the last resort before bankruptcy). You will see your credit rating decimated as you stop making your payments. Plus, some of these companies are little more than scams, charging outrageous fees. These companies can’t do anything for you that you can’t do on your own; you can negotiate your own settlements. However, some consumers just like to have the help, and to put it out of their hands.
If you take this tack, it’s a good idea to check with government approved credit counselors, and check with the National Foundation for Credit Counseling, for those who are more likely to be on the up and up.
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.