Consolidating debt is an excellent way to take back control of your finances. Any money which you owe on credit cards or loans is actually considered a debt, even if you are making repayments. Problems can appear quickly though when people approach their debt by only making the minimum payments necessary to keep from going into default. Typically a person will give first priority to instalment debt represented by loans which have a set amount due on a given date each month. Naturally less priority is given to credit card debt as they only require the minimum payment meeting rather than a set amount.
Debts begin to get out of control when the interest increases the overall debt and your payments make no headway in reducing the debt. If you notice a recurring pattern of only just managing to meet minimum payments whilst watching the debt increase on a monthly basis, then it is time to take control of the situation and consider consolidating your debt.
The two main choices when it comes to consolidation are a balance transfer card, to consolidate credit card debt on, or a consolidation loan, which can be used to bring your debts under one umbrella payment on a monthly basis. The advantage of consolidating your debts is that instead of having a multitude of payments to make to different lenders each month, all at different interest rates, you bring all the debt together and make one payment to cover all.
Firstly you need to consider if a balance transfer card or debt consolidation loan is the cheapest option for you. If you are able to get a balance transfer card which offers a zero percent APR, or even a very low APR, it will almost certainly save you money on the total of your current monthly interest charges.
However there will typically be a balance transfer fee to consider, so you need to work out if the saving is worthwhile when the fee is taken into consideration. It often is, but you need to be aware of several points. The balance transfer card low APR may only be an introductory offer so you need to look for one which offers the longest term as this will give you longer to reduce the debts. Also you must not use the card to run up any further debt or it defeats the whole object of consolidation.
The other option is a debt consolidation loan which you use to pay all your debts off and then just make one monthly payment to cover the consolidation loan. This may work best for those who are less disciplined, as there will be a set monthly amount to repay, whereas the balance transfer card will only set a minimum payment which those less disciplined may be tempted to pay, rather than paying as much as they can.
If a debt consolidation loan is secured, which involves putting collateral down, then I would recommend the balance transfer card as the better option, rather than risking your collateral. This also gives you the option of paying more, and thus reducing the debt quicker, whilst a loan constricts you to the monthly agreed amount.
Whilst you consider your options continue to pay your debts but always give priority to the debt which carries the highest interest rate, as this is the debt which is costing the most for you to service. Often you will hear the advice to pay down the smallest debt first, but this is ill advised unless the smallest debt is the one with the highest interest rate. Always concentrate on paying down the debt which carries the most interest as good fiscal practice.
Finally do not fall prey to a debt consolidation company as they do nothing for you which you are not capable of doing yourself. They do not offer the soundest financial advice and will charge you to make payments towards your debts on your behalf.
The advantages of debt consolidation is it allows you to reduce a number of lenders down to one monthly payment, and this naturally makes it easier for you to get a better handle on controlling your debts. While you are in the process of reducing your total debt by making use of a consolidation loan or balance transfer card then remember to avoid any future borrowing. Debt consolidation is a tool that gives you the chance to take control of your debt and pay it off, not an invitation to add more debt to your name.