When you have a large amount of debt spread out over several different accounts, combining the debt into a single package can be very appealing. Debt consolidation is a process that many use to work with a single account instead of multiple accounts. This process can help you reduce interest rates and simplify things, but it can also lead to some issues.
How Debt Consolidation Works
The basic idea behind debt consolidation is that you get all of your debts into a single account. One of the most common ways of doing this is to take out a loan and then use the proceeds from this loan to pay off the various accounts that you have. At that point, you only have one monthly payment to worry about. In some cases, people will combine multiple credit card balances onto a single credit card with a low interest rate.
Home-Equity Consolidation
One approach that you could use is to take out a home-equity loan and use that money to consolidate your debt. If you have paid on your mortgage for several years, you may have some equity built up that you can access through an equity loan. By doing this, you can take advantage of the major tax break. The interest that you pay on a home-equity loan is tax deductible. This means that your debt could give you a discount when you pay your taxes.
Credit Card Consolidation
Some consumers will use credit cards to consolidate their debt. With this strategy, you open an account with a 0 percent introductory interest rate. Then you use balance transfers to move all of the balances from your old credit cards onto the new card. When you do this, you may have somewhere between 12 and 18 months to pay off your debts without interest. While this can save you some interest in the short term, if you do not get the balance paid off, it can end up costing you significant interest when the introductory period is over.
Considerations
One of the primary goals of consolidating debt is to get a cheaper interest rate. Having a single account is also much easier to deal with instead of having to keep up with several due dates every month. While these benefits are attractive, you also have to be careful when consolidating debt. When you consolidate debts, you open up several different accounts that could be used. Unless you stop using your other credit accounts, you could end up in worse shape than when you began the process.
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