Should I Consolidate Debt?

People who are saddled with credit card or other types of consumer debt sometimes turn to debt consolidation in the hope of getting out of debt sooner. By paying off existing debt using a device such as loan to eliminate balances, they can possibly reduce interest rates and make lower monthly payments. However, consolidation may not necessarily result in saving money or reducing repayment time.

Better Management

If you have so many different debts that it seems like a credit card or loan statement arrives almost daily, you probably don't have a very good handle on your true financial situation. By consolidating all these debts and using one financial instrument such as a loan to pay them off, you'll have a better understanding of how much you really owe and what it will take to eliminate your debt. Making only one monthly payment instead of several can also help you in budgeting and planning.

Risk

Some forms of debt consolidation come with risk. A common maneuver is to consolidate debt by taking a home equity loan or line of credit against the portion of your home that you own to take advantage of a lower interest rate. If you choose this method, you need to ensure you make timely payments. If you default, your lender could initiate foreclosure proceedings and you might lose your home.

Increasing Debt

In some instances, consolidating debt can actually increase the amount you owe. For example, if you consolidate credit card debt by moving your balances to a new card offering a low "teaser" rate for a period of time, you often need to pay off as much of your balance as possible during the introductory period. When the teaser rate ends, you might find yourself paying an even higher rate than you were before switching.

Getting Help

An alternative method of managing your debt is to seek advice from a non-profit credit counseling service. Instead of consolidating your debt, the counselor will work with your creditors to lower your interest rates and set up a payment plan to get rid of your debt over time, without the need to take out another loan or use a new credit card. You will probably have to stop using any credit cards, although this can help you develop better spending and money management habits.