Debt Consolidation Advice

Debt consolidation is not for everyone. It may involve taking on a new debt, albeit at a usually lower interest rate, in order to pay off your other, higher-interest rate debts. At first glance, such an approach may seem like a mere continuation of a vicious credit cycle. And indeed, debt consolidation, or credit card debt settlement, is not meant to be a permanent solution to your debt problems. Debt consolidation was designed to give you a temporary financial break. It eases your financial burdens and gives you some breathings room, so that you can get back on your feet and start rebuilding your credit.

Pulling off debt consolidation successfully requires strict financial discipline, something that people in need of debt consolidation don’t usually possess: after all, it was over-spending that led them to the situation they currently find themselves in. According to some studies, over two thirds of Americans who resort to some form of debt consolidation end up, after two years, with as much or more debt as when they started.

However, if you are determined, and debt consolidation seems like a viable option that might just provide you with enough slack to help you take control of your debt and start better managing your personal finances, then read on. The following are brief explorations of some of the common methods of debt consolidation and how you could potentially benefit from them.

Home Equity Lines

Home equity lines use the current value of your home as leverage so that you can take out a loan to pay off other bills, or use as you please. In addition to the welcomed cash, you get a tax break too. But borrowing money against the value of your house can easily backfire.

Taking out a home equity loan usually entails refinancing your house, which results in a new contract with a (usually) higher interest rate. If you default on the new loan, you could lose your home.

The mistake that many people make is to borrow the entire amount the banks tell them they can borrow. This is often more debt than they can handle, even after the money from the home equity line flows into their pockets.

If you are thinking about resorting to a home equity loan, make sure to borrow only what you need to pay off creditors. If you borrow within your means, you’ll have an easier time staying afloat.

Low-interest Credit Cards

If you don’t own a home that you can borrow money against, moving your debts into a single zero-percent credit card, known also as credit card debt settlement, may be an option worth looking into. But, once again, using this method with positive results requires good planning and discipline.

Credit companies offer low rate credit cards as teasers, incentives for people to switch credit card providers. Many times, these cards are only offered to those with higher credit scores, so if you’re credit is too low, you might not qualify.

If you do qualify and are considering consolidating your debts into a single credit card, make sure that you read all the fine print before signing. Low, teaser rates only last for a short amount of time (usually between six and 12 months). During this time, you’re payments will be lower and you’ll have some money left over at the end of each month.

Use this time and extra cash flow to start aggressively paying down your debts. Credit card consolidation, once again, is not a permanent solution. You have to pair the financial break you get form moving your debts to a zero-percent credit card with good budgeting and spending practices.

Debt Consolidation Loans

There are a lot of companies and banks out there that offer debt consolidation loans, usually for a fee. The appeal of this option is that all of your debts (mortgage, student loans, etc.) get bundled into one. Instead of having to deal with 15 or more creditors, you take out one big loan to pay them all off. Now you only deal with one creditor and one monthly payment.

However, this convenience does not always mean that you’re saving money. Before you jump into a debt consolidation loan, calculate how much exactly you are paying now. Then, look at all the fees and interest rates that would be involved in the new loan and see if you would actually be paying less, or if you’d be paying the same as or more than before.

Good Management

The key to getting out of debt is learning to implement healthy financial management practices. Debt consolidation should be only one of the ways in which you are working to get out of debt. As mentioned several times before, consolidation provides a temporary break, but not a permanent solution.

To find out more about good personal finance practices and to receive a personalized plan to consolidate credit card debt and other outstanding debts, consult with a professional debt management company. Make sure it is certified, however, as there are many out there that might end up costing you more than they save you.