Photo: © iStockPhotos
Photo: © iStockPhotos
Consolidating the debt you're carrying on various credit cards into one monthly payment is a great way to more quickly eliminate financial stress. This great debt management tool offers a lower interest rate on your total debt, from car loans to mortgages to outstanding credit card balances. If you think you might benefit from a debt consolidation plan, consider the following.
Debt consolidation alternatives
There are various options for consolidating your debts. Some of these options are more feasible than others, depending on your credit score and total debt. While credit consulting firms sound promising when you're overwhelmed by your debt, beware of any service that offers you an easy fix. Be on the lookout for hidden fees that could substantially increase the amount of money you already owe. Instead, you might consider consulting non-profit organizations such as the National Foundation for Credit Counseling and the Consumer Credit Counseling Service. Both of these places offer useful advice and educational tools about effective debt management services. You also can find calculators online from Smart Money, MSN Money and Bankrate that can help determine whether debt consolidation could help you.
Home equity loan
If you owe less on your mortgage than the current value of your home, you could pay off your other debts by taking out a home equity loan. Please beware, however; this is a huge financial risk and if you default on your loan, you could lose your home.
For those with poor credit scores and inadequate banking history, seeking a loan through a credit union is a good alternative to doing so through a bank. By getting a loan through your employer's credit union, your loan will be guaranteed through your paycheck. Of course, the inherent risk is that if you lose your job, you will have to pay off the entire loan balance.
Roll over credit cards
If you carry most of your debt on credit cards, you can roll over those balances on high-interest cards to one with a lower interest rate. Watch out for credit cards that offer a 0 percent or low introductory rate. After a certain period, the interest rate could jump substantially.
If no other options are available, you can ask family or friends for help. While it can be uncomfortable, getting the terms of this loan in writing and paying back your family is crucial to maintaining a happy, healthy relationship. If you have a whole life insurance policy, you may be able to borrow against it. You need to pay it back to keep your settlement value intact. Finally, if you have no other alternatives, you might borrow against your 401(k) retirement plan. Unless you pay it back, you are sacrificing your retirement savings and may incur a significant tax penalty.
Debt consolidation is really about debt management. If you can make the necessary changes in your budget to pay down your debt or negotiate better interest rates with your creditors, you may not need to consolidate.
Read More About: debt reduction