Debt consolidation involves combining your smaller debts into one large debt. You are essentially moving your debt to a more convenient or manageable plan. Don't confuse debt consolidation with other debt management solutions that put you on a budget or try to reduce your debt.
Credit Card Approach
One way to consolidate your debt is the credit card approach. If you already have a credit card with a low interest rate and a lot of available credit, you could transfer your smaller debts to that credit card. You may even qualify for a low balance transfer rate. But be careful with that because the low rates for balance transfers are often teaser rates designed to go up after the promotional period. You can also apply for a 0 percent credit card, but again, that is a teaser rate, designed to go up in a specified time.
Effects
If you do transfer debt to a credit card, put that credit card away and stop using it. Otherwise, you could risk of being in debt for decades, according to MSN Money. Plan to make large monthly payments to pay down the debt on the card. If you only pay the minimum the card requires each month, you will be in debt for years. This approach can cause your credit score to suffer by using up your available credit on the card. When you max out your credit card or come close to doing so, it hurts your credit score. The amount owed compared to the amount of credit available is one factor that helps determine your credit score.
Home Equity Approach
If you own a home and have equity in it, you could apply for a home equity loan or a home equity line of credit, use that money to pay off your debts and then pay off the home equity loan or line. You may get a lower rate of interest on a home equity loan or line than what you are currently paying on your bills, and the interest you do pay on a home equity loan or line might be tax-deductible.
Warning
You must take certain precautions when you take out a home equity loan or line of credit because your home is on the line if you miss your payments. If your finances are shaky, you should not risk your home. When you pay your bills off with money from a home equity loan, you are changing unsecured credit card debt (unsecured means no assets are tied to the debt) to a secured home equity debt. Should you need to file bankruptcy, you won't be able to erase the home equity debt in bankruptcy as you probably could with your credit card debt, according to MSN Money.
Other Types
Other debt consolidation options are borrowing money from your 401k or taking out a loan from a bank or credit union. If you borrow from your 401k, you typically pay the money back at a low interest rate, and you are paying yourself back, not a lender. However, a 401k is supposed to be for your retirement, and it is best not to tap into it if possible.
Borrow the money from a bank or credit union with a low fixed rate may be your best option, according to MSN Money. One drawback to taking out an installment loan from a bank or credit union is the temptation to run up your credit cards again. Credit counselor Chris Viale told Bankrate.com that 70 percent of people who take out a loan to pay off credit cards end up with the same or higher debt load within two years.
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