Best Ways to Consolidate Debt

Debt can be difficult to get out from under, especially when you have several high interest rate credit cards requiring sizeable payments. Many people end up taking advances from one card to make a payment on another, which only serves to increase balances and get them further behind. All is not lost, however, as there are several ways to consolidate debt into one easy to manage monthly payment. Perhaps the easiest option for consolidating debt is to perform a credit card balance transfer. Balance transfers are the movement of a balance on one credit card, or several credit cards, to a different card with a lower interest rate, which should result in lower monthly payments.

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Many companies offer special low interest rates for a specified period of time to help the borrower pay down the balance at a rapid rate. Be aware that most companies will charge a transfer fee, generally 3-5% of the total amount being transferred. Make sure the fee will not be greater than the amount being saved by the decreased interest rate.

Homeowners can take advantage of the equity they have built up by taking a home equity loan or line of credit. Either will use the home as collateral against a loan to pay off outstanding debts, and often the lender will cut and mail checks directly to the companies being paid off instead of paying the borrower directly. The loan is a closed ended product, with a set start and end date and a constant payment amount. A line of credit is revolving, which means the money can be paid down and borrowed again in the future and has varying monthly payment amounts. Closing fees can be costly, although the lower interest rates and tax advantages connected to home equity loans and lines of credit can make the savings outweigh the initial expense.

Debt consolidation loans are offered to do just that: consolidate debt. They do not require collateral, and often do not have fees incurred at the time the money is dispersed. These loans are offered by banks, credit unions and other lenders, and also through some debt consolidation companies. When borrowing from a consolidation company, read the loan agreement carefully to be certain they are not writing in additional fees to the regular monthly payment. These hidden costs can not only put a person further in debt, but also make payment amounts higher than necessary.

An individual retirement account or 401k is an account that people should usually never touch. Early deductions from these accounts can be costly, as penalties will be charged. However, to get one out of a difficult debt situation, taking money from a retirement fund should be considered. Some accounts offer the option of taking a loan against the funds, which can be taken without penalty if repaid in a specified amount of time. Since accounts vary greatly, one should speak with an account administrator before touching his or her retirement account.

Once a method of consolidation is decided and acted on, it is imperative that monthly payments are made in a timely fashion. Falling behind can be easy, and a great way to avoid the credit card trap is to either destroy the cards or secure them in a safe deposit or lock box. Consolidation does not get rid of the debt, but rather makes it more manageable. Being careful not to drive credit card balances back up will help keep payments affordable and save one from future debt problems.