Consumer Guide to Debt Consolidation

Debt consolidation is the transferring of a number of smaller debts into one larger debt. Consolidating your debts can make managing your finances easier and lower the overall interest you pay, but potential pitfalls exist. Research your options so that you can make an informed decision before moving to combine your debts.

Options

You can consolidate your debts in a variety of ways. Balances on credit cards with high interest rates can be transferred to one lower-interest card. A personal loan can be used to pay off other creditors. A home equity loan or line of credit typically has a lower interest rate than other credit cards and personal loans you have and can also be used to pay other debt.

Benefits

Consolidating your debt can lower the amount of money you pay out over time, as the object is to move your existing debt to a platform with lower interest charges. Your overall monthly payment on the consolidated debt is sometimes lower than the sum of payments you were making before, and you no longer waste time tracking multiple debts and payments.

Drawbacks

Drawbacks exist for all methods of debt consolidation. A credit card account you consolidated debt on may have the interest rate raised or the limit slashed, raising your debt or harming your credit score. A personal loan may have a higher interest rate or be difficult to obtain, since the debt is not secured by any property. Both home equity and lines of credit mortgages involve pledging your house as security for the debt, and you could lose your home if you cannot make the payments.

Considerations

Debt consolidation is not necessarily the right option; how well the approach works for you depends on your financial circumstances and money-managing skills. You must pay down the consolidated debt in a timely manner, otherwise any interest-saving benefits you earned are lost. Opening up new lines of credit after you've consolidated your debt is sometimes tempting, but doing so could land you in a tighter financial situation than before you consolidated.