How To Consolidate Debt

The number one way people consolidate debt is by getting a second mortgage on their house.  They then use the proceeds to pay off credit card debt and car loans.  If you have equity in your house, this may be one of the best ways to consolidate debt.  It does have one major pitfall. 

Many people get all their credit card debt paid off, but don't stop spending on those credit cards.  Then they end up with just as much debt on their credit cards - PLUS - a new second mortgage to pay off.  You may end up in worse shape if you can't stop spending. 

That being said, getting a second mortgage is still maybe the best, and certainly the most common way to consolidate debt.  Almost anyone with a mortgage and equity in their house can do this.  See How to Get a Home Equity Line of Credit for more ideas on this method. 

But what about someone who doesn't have a house?  Is there help for them?  It probably isn't as easy but it still might be possible.  Below is an option. 

Many people with credit cards get offers for a super low rate on money borrowed from that credit company.  Usually they will come with a check you can use.  If you already have that particular credit card making the offer, this just got easier - but it's also not without pitfalls.  Most of the time, that super low rate is a teaser rate.  It may only be low for six months or a year.  But if you're paying 18% on other cards with $10,000 in debt, and you get an offer to pay 7.9% for 12 months, you may save yourself over $1,000 in interest over 12 months.  That savings can certainly help pay down your debt faster!  Many people will point out that the rate is just going to go back up.  Sure, but for those 12 months, you saved about $1,000!  So it might certainly pay to consolidate several higher interest rate cards onto one lower rate card - even if it is a short term teaser rate. 

Read the fine print with those deals.  Details like those below are important.

  1. Make sure the offer is good for balance transfers, not just for purchases
  2. Check to see what the transaction fee is.  Often there is a 3% transaction fee with a minimum of 5.00 and a maximum of 75.00.  Sometimes there is no maximum and that would certainly raise the cost of consolidating to a low rate card.  Be aware that if you are transferring several higher rate cards to the one lower rate card, they will usually charge you the transaction fee per each transfer.  A way around that is to transfer the entire amount to your checking account - incurring only one fee - then using those funds to pay off several credit cards. 

Regardless of which method you choose, use the extra savings to pay down that consolidated debt faster.  And make sure the sudden free space on those credit cards isn't quickly filled up again!


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