Debt consolidation means going from having many creditors to having one. This way, you have just one payment to make each month instead of several. Many people find this makes keeping track of their bills easier. Depending on how you consolidate your debt, you may be able to reduce the total amount you pay on your bills each month or the interest you pay on your debts.
Debt-Consolidation Methods
Several methods are available for consolidating your debt. For example, you could decide to entrust a credit counseling organization to pay your bills each month; for a fee, you pay them a monthly payment which they distribute to your creditors. In some cases, your creditors will lower your interest rate or waive certain fees because of your involvement with such an agency. Alternatively, you could take out a loan through a debt-consolidation agency. However, either of these methods will require that you pay fees for the administration of your funds.
Debt Consolidation Fees
If you use a company to help consolidate your debt, even a nonprofit, you will have to pay fees for its services, fees that can be exceptionally high in some cases. According to Bankrate.com, you could pay as much as $8,000 to a debt management agency for the administration of $20,000 of debt. Luckily, you do not have to use a debt-consolidation or debt management company to consolidate your debt; you can do it yourself. By consolidating your debt on your own, you avoid the necessity of taking on this extra cost.
Using your Credit to Consolidate your Debt
To consolidate your debt on your own, you have two basic options. First, you could use credit cards. By using a combination of balance transfers and a low annual percentage rate, you could consolidate your debt within a matter of days if you have adequate credit available. For example, you could open a 0 percent introductory rate credit card and transfer all your debts there. Alternatively, if you have an existing credit card with a lower interest rate, you may want to talk to your credit card company about extending your credit limit to allow you to consolidate all your debt on the one card. If using credit cards is not an option, you could take out a loan instead, such as a home equity loan or line of credit. While you will have to pay an upfront loan origination fee in doing so and secure the loan with your home, the interest rate will almost always be considerably less than you are currently paying, especially if most of your debt is credit card debt. Moreover, the interest you pay on such a loan is tax-deductible.
Working With Your Creditors
Most creditors will be willing to work out some sort of repayment plan with you to avoid transferring the debt to a collections agency. Further, if you are able to pay a lump sum, such as if you get a home equity loan or increased credit line, you may be able to settle your debt with your creditors for less than you owe.
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