Reducing Your Debt Through Consolidation

When you're juggling multiple creditors just managing your bills payments can feel overwhelming. You may find your self emotionally stressed, your debt mounting and your personal fiancés spiraling out of control. For many people the first step toward regaining control of their financial situation is debt consolidation.

How does Debt Consolidation work?

When you consolidate your debt you are using low interest credit you have in one place to pay off higher interest debt you have somewhere else. For example if you owed money on 4 different high interest credit cards you might pay them off using one lower interest card. The result would be 4 fewer bills to pay each month, lower overall minimum payments, and a lower interest rate on the debt that you transferred. You may then be in a position to apply the money you save each month toward reducing your over all debt.

What are my debt consolidation options?

Taking out a debt consolidation loan. If you qualify you can take out a debt consolidation loan from a bank or other lending institution. In most cases you will have to put up some of your personal assets in order to secure the loan. You may also consider a home equity loan or refinancing your mortgage. These options will generally require you to be in good financial standing.

Borrowing from your 401K or life insurance. If you are currently employed and have a 401K retirement account you may be able to borrow from it. The advantage is that you are borrowing your own money. The downside is that if you fail to pay it back in full within 5 years you face substantial penalties. If you have a whole life insurance policy there are fewer risks to borrowing from it other than the beneficiary receiving less if you fail to pay it back.

Transferring balances. When transferring credit card balances be sure to transfer your debt to the lowest interest card you have or apply for a new card altogether. Many credit card companies will offer special low introductory interest rates on balance transfers so make sure you call and ask. Usually the low interests rate will apply for a specified time such as "3.99% APR financing on balance transfers for 18 months." Read the fine print on any offer and call the credit card company with questions about the terms.

Like with anything else if an offer sounds too good to be true it probably is. But if you have some low interest credit available and you do your research debt consolidation may prove to be your first step toward getting out of debt.

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