Methods for Debt Consolidation

Precarious financial problems, bad credit, and excessive debt are significant causes of physical and emotional stress. The most common form of debt in America is credit card debt. Millions of Americans owe more to credit card companies than they can possibly pay back in their lifetime by making just the required minimum monthly payment. If you are in this debt trap, now is the time to take those first steps toward becoming debt free. If you learn how to handle your finances and control your spending, you can be on the road to financial freedom.

Consolidating Debt

If you find yourself with multiple forms of debt, with varying interest rates and high balances, you may benefit from a structured debt reduction program. There are many ways to tackle debt, which we discuss in more detail below.

Debt Facts: The average amount of credit card debt per household in America is approximately $14,750. Each year, Americans pay over $20 Billion in credit card fees and penalties! Staggering.

Using Loans to Consolidate Debt
One of the more common ways to consolidate your debt is to use a loan to pay off all other outstanding debts. Loan sources include credit unions, banks, home equity (ideal), family (yikes), and peer lenders. Irrespective of your funding source, the most effective debt consolidation will reduce high-interest debt into one payment, hopefully at a lower interest rate.  By paying off those high interest items with your lower interest loan you will be reducing the amount of interest you pay, which, in turn, will lower the amount of money you dish out throughout the life of your debt. 

Using Your Credit Cards
You can also consolidate some of your debt with a credit card.  From time to time credit card companies run offers by for a low interest rate, or even no interest, for a preset period of time.  You can transfer balances from higher interest cards, which will lower the overall interest rate you pay, and therefore the amount of money you have in outstanding debt.

Be careful when using this option.  Although credit card companies may offer you low or no interest rate options, those so-called "teaser rate" offers typically expire after a short period of time, after which the interest rate may balloon to a point higher than the rates on the cards and debts you consolidated.  Some cards charge you a one time fee to transfer balances from other cards.  That fee can be as much as four percent (4%) of the transferred balance.  If this is the case with your card, make sure the transfer fee is less than the amount of money you would have paid in interest had you not transferred those balances.  If not, the transfer could actually be costing you money and that defeats the purpose of consolidating debt. This is not an ideal method for consolidating debt, but if you have sufficient credit and you can qualify for good credit card with a lower interest rate, in rare cases this method works. For others, it is just another credit card that will eventually get maxed out, so please keep this in mind before you go this route.

  Additional Debt Tips

• Always have cash on hand
• Pay your essential debts first
• Refinance to reduce debt cost
• Notify creditors of problems
• Negotiate with your creditors
• But, don't expect perfect results
• Do not write post-dated checks
• Do not write bad checks
• Read our debt-reduction series

Home Equity Lines of Credit
If you own a home, perhaps the best methods for debt consolidation is to use your home's equity, which can be unlocked by obtaining a home equity line of credit, also called a "HELOC."  If there is sufficient equity in your home, a bank could offer you a credit line which works much like a credit card, but with a much lower interest rate.

Your credit limit will be a fraction (usually 80%) of your home's equity, and you can use your line to payoff credit cards and personal loans that have higher interest rates.

In some cases, using a HELOC to consolidate your debts may help you gain valuable tax advantages. Check with a local CPA or qualified tax professional for more information

Create a Budget within Your Means
Budgeting your life is a simple process and involves keeping close track of your income and expenses on a monthly basis.  You don’t need a sophisticated computer spreadsheet to create your budget, but a calculator will be handy.  Your budget will have two sections; income and expenses.  Income is any money that you take in each month.  This may include things like salary, bonuses, commission, tips, etc.  The second section, expenses, includes anything for which you spend money like rent, groceries, auto fuel, etc.

Debt should be a very small part of your expense section.  If you find that your monthly minimum credit card or loan payments make up the bulk of your monthly expenses you could have a problem with credit.  This should be your first priority in terms of eliminating your debt.  Again, start with the highest interest rate and work your way down until all debt is eliminated and your credit card balances, personal loan balances, and other liability balances are zero.

A few years ago, we wrote a very popular article about learning to live within your personal means, which amounts to spending less than the amount of money you bring in each month. This can be especially difficult for city dwellers who encounter much higher rent, home prices, retail costs, and a tendency to compete with others inside their social circle. If you find yourself in this situation, and an endless cycle of spending and debt accrual to support an extravagant lifestyle, you really need to take a close look at your budget and find ways to save. Your budget will allow you to put some money into savings and apply more toward paying down your debt. Once you get your spending and debt under control, you may see an improvement in your credit and experience significantly lower stress levels.

Credit Counseling
If you have trouble sticking to a budget, or your find that your expenses and debt have gotten too out of control it may be time you get help from a professional credit counseling service.  There are non-profit counselors and private companies which can assist you in making and sticking to a budget.  There are also companies which can help restructure your debt, lower interest rates or monthly payments, and in some cases even reduce your outstanding balances.

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