Which Debt Consolidation Solution is Right for You?
Janna's Blog
- Posted:
11/20/2007
Debt consolidation sounds easy: lump all of your monthly debt into one outgoing payment to reduce the amount you spend on interest each month. This can be a life saver for some. A family with unpaid medical bills, a mortgage, a couple of car payments, and a few credit cards can soon find that they’re shelling out huge amounts of money on interest alone.
But which consolidation option is best? That depends on the severity of your situation.
If you can pay off your debt in a year or less, 0% interest credit cards would be a good consolidation choice. The debt you owe on high-interest cards is transferred to a card that charges 0% interest for a specified period of time – typically 6 to 14 months.
If your debt is fairly severe, you might want to visit a credit counseling center to get enrolled in a debt management plan, or DMP. For the duration of a DMP, you make a single monthly payment to the credit counseling organization, which then pays your bills. Be choosy when selecting a credit counselor; participating in a DMP can hurt your credit score, and you might not be allowed to use your credit or apply for new credit for the program’s duration.
Debt can also be consolidated by borrowing against home equity, retirement, or life insurance policies. This isn’t advisable except as a last resort. If you fail to repay the new loan, you could lose your home or benefits. Speak with your bank or credit union about a low-interest consolidation loan before putting any hard-earned assets at risk.
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