Consolidating credit and debt provides a means of simplifying monthly finances and acquiring a lower interest rate on debts. Lower rates allow you to pay off the balance quicker, because you'll spend less money on interest. There are several ways to consolidate debt, and you don't have to own a home to take advantage of consolidation methods.
Credit Card Options
Assume you have three credit cards with interest rates of 20 percent or higher. This results in three monthly payments, and your minimum payments probably are expensive because of the high interest rate. However, applying for a low-interest-rate credit card and moving the balance from all three cards to the lower interest card may save you money each month. Balance transfers are a quick way to consolidate credit and lower monthly payments. Balance transfers typically require fees that range from 3 to 5 percent of the transfered amount, according to the Bankrate website. Thus, transferring a credit card balance of $3,000 can cost up to $150. Consider this fee when deciding whether to transfer your balance.
Debt Consolidation Loan
Debt consolidation loans approved by a bank or credit union provide enough funds to pay off your credit cards and other types of debts. After eliminating these debts, you forward monthly payments to your bank to pay off the consolidation loan. Like balance transfer credit cards, debt consolidation loans can have lower interest rates than credit cards, and that would mean lower payments. Plus, banks establish a specific term for the loan--perhaps five years. This option allows you to pay off your debt within a specific time frame. Obtaining a consolidation loan involves meeting the bank's requirements, which include have good credit and sufficient income.
Home Equity
Property owners have the option of using their home equity to consolidate debt and get rid of high interest balances. This method requires adequate home equity, and you must prove you have the financial wherewithal to repay the home equity loan or second mortgage. If approved, the mortgage lender issues a check for the amount requested, and you use the money to pay off your debts. If you are considering a mortgage refinance, you may be able to borrow cash from the equity and use this money to pay off debts as well. Cash-out refinances increase your mortgage balance, however, and they may increase monthly payments.
Debt Consolidation Services
Obtaining a credit card to transfer your balances, applying for a debt consolidation loan or using home equity to consolidate debts require a good credit rating. Individuals who don't meet these requirements have the option of consolidating debt through a debt or credit counseling service. These companies do not lend money to consolidate debts. Instead, they manage your debts for you and establish a relationship with your creditors to obtain lower interest rates on your debts. Debt consolidation agencies place a freeze or hold on your credit accounts to prevent new charges, and you no longer work with your individual creditors each month. You forward one payment to the debt consolidation company, and it makes payments to your creditors. Some consolidation services charge a monthly service fee and/or a setup fee, and other consolidation services operate as nonprofit organizations.
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