How To Consolidate Debt: Ways To Reduce Your Debt Load

by JT on July 3, 2009

How to manage debt through debt consolidation.

If you’re tired of paying multiple bills, debt consolidation may be something to consider. A few of my friends have tried it out and they’ve told me how well it’s worked out for them. These were people who accumulated credit card debt that eventually became tough to manage. They then opted for debt consolidation to resolve their issues and found themselves pleased to have taken an active approach to improve their debt situation.

consolidate debt

Through the debt consolidation process, you can merge all your debts and replace them with a single monthly payment that you can afford. The best part is that it actually relieves you from the burden of making several payments every month. And you may realize that by doing so, you may lower the risk of having to deal with a number of persistent debt collectors all wanting a piece of you.

How To Consolidate Debt: Ways To Reduce Your Debt Load

So, how do you consolidate your debts? Well, the goal is to roll over your existing loans to a single loan (or fewer, usually cheaper loans). You can do this in several ways: by getting enrolled in a debt consolidation program, by taking out a debt consolidation loan, by transferring your debt to lower interest cards or by taking out any type of cheaper loan. Let’s take a look at some of these methods:

#1 Balance Transfer Cards

You may want to consider using balance transfer cards or low interest credit cards as a way of reducing your debt more quickly. But you’ll have to commit to an aggressive payment schedule to make this happen successfully. If you’ve got a lot of credit card debt, see if you’re able to transfer your balance to one of your existing cards with a lower interest rate, or to a new balance transfer card with good rates. Note, however, that by applying for a new credit card, you may inadvertently knock down your credit score temporarily. If you’re doing a true balance transfer, the terms usually include a 3% fee and a limited promotional period during which a low teaser rate applies. If you are unable to pay off your debt before that period is up (usually between 6 to 12 months), your balance may be subjected to higher rates — so keep an eye on your debt! Here are some of the best balance transfer cards I’ve come across:

Credit Card
Interest Rate
Transfer Fee
Discover More Card 0% for 12 months 5% transfer fee
Discover More American Flag 0% for 6 months 3% transfer fee
IberiaBank Visa Rewards Card 0% for 6 months No balance transfer fee
Citi Platinum Select MasterCard 0% for up to 18 months 3% transfer fee
Citi® mtvU™ Platinum Select® Visa® Card for College Students 0% for 6 months, purchases only 3% transfer fee
Citi Forward Card 0% for 6 months 3% transfer fee
Citi Forward Card for College Students 0% for 6 months, purchases only 3% transfer fee

#2 The Debt Consolidation Program

When you sign up with a debt consolidation program, you hire a debt consolidation company to work with your creditors or collection agency (on your behalf) so that they lower the interest rate on your bills and make it easier for you to pay down your debt. The company and your creditors work out a monthly payment plan that you can afford. This way, you’ll end up only having to make a single payment each month to the consolidation company. The company then divides the amount amongst your creditors and makes sure that each of them receives a payment on a monthly basis.

A lot of people go for debt consolidation programs because it makes life easier: you don’t have to worry about dealing with several creditors and managing multiple accounts at different rates of interest. The creditors (or collection agency) will send you monthly statements, but you don’t have to handle any creditor/collection calls. While you’re on the program, the consolidation company communicates with creditors or collection agencies on your behalf. Most companies offer a free debt consultation where they review your situation in order to ensure that you’re the ideal candidate for consolidation. But they do charge a fee for negotiating with your creditors.

While this can be a great way to control household debt, do note that you need to do your due diligence before you sign up with any debt consolidation program out there. Not all companies in this industry are necessarily on the “up and up”, meaning that they may promise you much more than they can really do, then charge you a fee for less than satisfying results.

You may want to visit a site like Debt Consolidation Care to review their services — they provide you with leads for possible debt consolidation companies to consider. However, make sure you check with the Better Business Bureau and read possible third party reviews before you engage anyone’s services.

#3 The Debt Consolidation Loan

Finally, a debt consolidation loan is meant to achieve the same goal as a consolidation program, which is to replace several bills with a single monthly payment. But in this case, you’re taking out a new loan to repay existing debt.

Debt consolidation loans can be unsecured personal loans or secured debt such as mortgages or home equity loans. If you’re looking to get a mortgage as a way to consolidate debt, you’ll have to use your home as collateral. And in case you miss payments somehow, you may end up losing your home in a foreclosure! Because of this, I believe that getting a personal debt consolidation loan (rather than a mortgage) would be a better choice. But you need to have good credit if you’d like to qualify for one.

Your single debt consolidation loan will require monthly payments typically at a low rate of interest over a longer time frame. This loan offers you a lot of convenience, but you may potentially end up paying more in interest over the life of the loan because of the longer repayment terms. Thus, even though your monthly payments are low, the total interest you pay over the entire term can be quite huge!

As you can see, there are many avenues you can explore to help make your debt situation more palatable. Just make sure you review both sides of the coin when you look into these possible solutions.

If you enjoyed this post, you can get free regular updates through our RSS Feed, or you can have our latest posts delivered to your email inbox by supplying your address here. Your address will only be used for this purpose, and you can unsubscribe anytime.

{ 5 comments… read them below or add one }

1 Leila Houshmand July 10, 2009 at 6:06 pm

I am currently a student & not working & I have a lot of credit card debt. I wanted to know if I could consolidate my debt.
thank you

2 Dean's Credit Ideas Guide August 11, 2009 at 2:29 pm

Consolidation of debt can be a big help (it was in my case years ago). Thanks for sharing your ideas (both pro and con) here.

3 Buddystips September 5, 2009 at 8:56 pm

I’m a big proponent of debt consolidation ONLY if it leads to reduce payments and the freed up funds are blended with the consolidation payment to rapidly reduce or pay off the consolidaton loan. Otherwise, consolidation makes no sense. This takes discipline and self-control. I have seen friends of mine consolidate their debt, free up funds by reducing their payments, and continue with the normal spending pattern…the result…they go deeper into debt. If you consolidate, do so with the sole purpose of paying off the consolidation loan quickly by using the funds freed up to accelerate your consolidation payments.

4 Alison @ Reduce debts October 26, 2009 at 8:55 pm

Another idea is if things are pretty bad is to ring up your credit card company and try to negotiate for a lower interest rate. The last thing they want is for you to default on your loan and be left with a huge loss.

5 Paul Sarwana May 16, 2011 at 4:09 am

Good points and easy to understand post.

IMHO, consolidation should only be used as a short term debt solution. If the debt problem is caused by bad spending habits then the key to stay out of debt is changing the them from consumptive to productive. For most consumers, however, this advice is not favorable because they tend to look for instant solutions.

Leave a Comment