If you're struggling under a big load of debt, take heart. A strategy called debt consolidation could have been a good option for solving that problem. In fact, if you use this strategy correctly it can help you get out of debt quicker and reduce the amount of interest you need to pay.
The three flavors of consolidation
There are basically three ways to do consolidate debts. First, you can transfer all of your high-interest credit card debt to one that has a lower interest rate. For example, if you have credit cards with interest rates of 18%, 20% and 22%, you could all of these debts to a new credit card with a 12% interest rate.
Second, you can consolidate credit cards by getting a consolidation loan. And third you could go to a credit counseling agency that would help you develop what's called a debt management plan.
However, before you choose any of these alternatives, it's important to know the pros and cons.
Pro # 1: You'll have a lower monthly payment
When you use debt consolidation to pay off multiple debts, you should end up with a monthly payment that's less then the total of the monthly payments you've been making.
Con # 1: It will take you longer to pay off the debt
If you choose either a debt consolidation loan or a debt management plan, it will take you longer to pay off your debt. In fact, regardless of which of these two options you choose it will probably take you at least five and maybe as long as seven years to become debt free.
Pro # 2: You will have a lower interest rate
If you're carrying a lot of credit card debt, you're probably paying high interest rates. In comparison, you should be able to get a debt consolidation loan at 5% or less. If you choose to consolidate all those debts on a new credit card, you'll be able to get what's called a 0% balance transfer rate for 6 to 18 months, which would then go to maybe 12%.
Con # 2: It can cost you more
If you choose to move your multiple credit card debts to a new card with a lower interest rate, it may not cost you any more – depending on how long you take to pay off the new card. However, if you choose a debt consolidation loan, it will probably cost you more because you'll be paying that interest over a longer period of time.
Pro # 3: You'll get rid of all those collectors
You're probably receiving calls from your credit card providers or from debt collectors. When you consolidate your debts, you will eliminate all those harassment calls.
Con # 3: You may have to cut up your credit cards
If you go to a consumer credit counseling agency for help, it will help you develop a debt management plan and will negotiate with your creditors to get your interest rates reduced and for them to accept your plan. However, you will have to cut out all of your credit cards and be careful to not take on any new debt for the five or so years it will take you to complete your plan.
Do not confuse debt consolidation for debt elimination
Consolidating debt does not mean you're eliminating it. Whether you choose to get a debt consolidation loan or a debt management plan, you need to understand that you're just moving your debt from one set of creditors to another.