Combining debt can lighten your wallet and your financial burdens. Credit card companies, mortgages and debt management services offer debt consolidation to move your debt from many high-interest credit cards into a single haven of lower interest. Consolidation allows for one monthly payment and one place to manage debt. In the right place, debt consolidation can even lower your tax bill. However, debt consolidation is not an easy fix to debt problems, especially if you have large debt. To get the most out of combining debt, you need to find long-lasting lower interest rates, resist the urge to put things on credit and exercise disciplined money management.
Using Credit Cards
Balance transfers can move debt from high-interest credit cards to low-interest credit cards. This approach works best with low-balance credit cards, especially your department store cards. Don't count on credit cards to combine large balances. Depending on your credit score, you might get a small credit limit. Many card offers lure you with "teaser rates," such as zero-interest on balance transfers. At the end of the introductory period, your rate will jump significantly. Thus, you will have only six months to a year to fast-track your debt reduction with a new credit card. Don't defeat the purpose of combining debt by using the new card and growing your debt; instead, shred or cut the plastic as soon as you get it.
Home Equity Loans
Home equity loans can combine more debt than credit cards. With these loans, you borrow against the difference between your home's value and what you owe on it. The money you borrow then take care of your credit card balances. Generally, home equity loans carry lower interest rates than your credit cards. Making interest payments for a mortgage creates tax deductions; you cannot deduct payments to a credit card company. However, using a home equity loan hitches what was unsecured debt to your home. If you miss payments on your loan, you can lose your home to foreclosure.
A credit counselor can create a debt management plan for you to pay off your debt in full. Unlike Chapter 13 bankruptcy or a debt settlement plan, debt management doesn't cut your credit card balances, just eases your ability to pay them off. The counselor gets your credit card companies to bring down the interest rates and your payments. You make a single payment each month to the counseling agency, which sends your money to the creditors. In 36 to 60 months, you are free of the debt. If this route interests you, use a reputable agency, such as one that belongs to the National Federation of Credit Counselors or the Association of Independent Consumer Credit Counseling Agencies. These groups hold member agencies to high standards designed to assure that you are being well-served, not victimized by scams or incompetence.
Don't Add Debt
Combining debt doesn't work if you keep adding debt. Close and cut the old credit cards. Trim the excess from your budget so you will rely on cash, not credit. AICCCA says stay closer to home if your budget does not allow for extensive travel. Find a lake, beach, swimming pool or other attractions in or near your community. If you eat out, forgo the appetizers and opt for water instead of sodas. Remove premium cable services and satellite radio. Use the extra cash to pay more than the minimum monthly credit card payments. Each statement gives tells you how long it will take to pay your balance with only the monthly payment and how you can shorten the path to being debt-free by paying more.
- United Kingdom: Directgov: Money, Tax and Benefits: Consolidating Debts
- Consumer Reports Magazine; December 2011: New Credit Card Deals:
- Indiana Department of Financial Institutions: Home Equity Loans and Lines of Credit
- University of Illinois Extension: Open Doors Housing: Is a Home Equity Loan Right for You?
Christopher Raines enjoys sharing his knowledge of business, financial matters and the law. He earned his business administration and law degrees from the University of North Carolina at Chapel Hill. As a lawyer since August 1996, Raines has handled cases involving business, consumer and other areas of the law.