When you face the repayment of a large amount of debt, you may wish to pursue a debt consolidation plan to help with the process. By consolidating your debt, you can focus on a single payment and potentially lower your interest rate. When consolidating debt, you need to keep a few tips in mind.
Negotiate Interest Rates
When you enter into a debt consolidation plan, you may be able to lower the amount of interest that you pay your creditors. This is especially true if you have a significant amount of credit card debt. Most credit cards charge very high interest rates above 10 or 15 percent. If you are willing to negotiate with the credit card companies, you may be able to get your interest rates down to 2 to 5 percent. You could negotiate on your own or hire a credit counseling service to do it for you.
Watch Fees
Many people in this situation hire a debt consolidation company or a credit counseling service to help with the process. While this can help reduce the amount of responsibility you have in this process, it can also add to your costs. Although paying something is to be expected, make sure that you do not have to pay more than is reasonable. Take into consideration exactly what the company is doing for you and see if their fee is in line with what they offer. You may want to shop around with various providers to make sure that you are getting the best deal.
Watch for Scams
In the debt consolidation industry, there are a number of scam companies that could try to take advantage of you. When signing up with a company, you need to check with the Better Business Bureau to see if they are legitimate (see Resources). Some companies like to charge large upfront fees and then never provide any services after they get access to your money. Be very hesitant to work with companies that charge a large amount of money upfront.
Consider Your Options
When looking for the best way to consolidate your debt, you need to look at the various options you have. For example, you may want to take out a home-equity loan so that the interest you pay is tax deductible. You could also borrow from a life insurance policy at a very low interest rate. Some like to use credit card balance transfers to finance the consolidation, but you need to consider the risks of doing so. This strategy is very risky as it could result in large interest charges in the future.
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