How to Consolidate Debt

I listen to the radio on the way to work every day. At least once every morning, I hear a commercial talking about debt consolidation services. Some of them are good companies trying to help you and some are predatory and are just trying to make a buck. It is important to know how debt consolidation works so you can make good, informed decisions.

Credit Cards

The most common reason to consolidate is to get a lower interest rate. While it is also nice to have fewer payments, the lower interest rate savings can be significant. To consolidate debt with credit cards, start by making a list of your cards, interest rates, and outstanding balances.

Most cards will let you do a balance transfer. Make sure that there is no fee or that the fee is low enough that it is still worth the transfer first. Work with the bank that has a lower interest rate to move the balance to the lower interest account.

Student Loans

You are only allowed to consolidate student loans once, so make sure it is worth it when you make the move. The government currently subsidizes Stafford loans to 6.8% interest. Other loans have varying rates. If you can get them to a lower rate, by all means jump at the opportunity.

The only time I would warn against consolidating student loans to a lower interest rate is if the higher interest balance is very small. If you can come up with a way to make extra payments that would eliminate that loan all together rather than consolidating over a longer period, it may be better for you to pay the higher rate for a short period of time than a lower rate for up to ten years.

Equity Backed Consolidation

If you are a homeowner, you have likely built up home equity. While I would never suggest taking out a home equity loan for spending, it could be a good idea for consolidation.

Secured (equity) loans usually have a much lower interest rate due to the collateral attached to the debt. Because you are responsible and would not miss payments, you have no risk of losing your collateral. (You are responsible, right?) Under that circumstance, you could refinance your credit cards into one home equity loan at a rate that can easily save you 15% per year.

What Should You Do?

You have to decide whether the circumstances are right for you to undergo a debt consolidation. If you decide to do so, make sure you work with a reputable bank or company that has your best interests in mind.

As always, post your questions and thoughts in the comment section below.

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