If you are carrying credit card balances and other unsecured debt, one possible solution to reduce debt is consolidation.  But you might not realize that you can consolidate your credit cards and other debt with several different methods.

Another important thing to realize is that the best option for someone else may not be best for you.  This can all be incredibly confusing, so today I am going to try to break down your debt consolidation options and outline the pros and cons of each.

Your own financial situation will determine what options you have available.  If you have very good credit, the first few options may be possible for you.  If your credit needs a lot of work, check out the options towards the end of the article to see how you may be able to consolidate your credit cards.

Consolidation Options if Your Credit is Good

1.  If you have a healthy credit score, you own a home, and you have equity in the home, you might be considering refinancing or getting a home equity loan to consolidate your debt.  It seems like everyone was tapping into their home equity just a few short years ago, and many people were even borrowing against equity that they didn’t have!

This was and still is a popular option for paying off debt because it has some very nice benefits for most people.  You can consolidate your debts into a lower interest loan, and you usually have a much lower monthly payment as well.

While that sounds very attractive to many people, there are some drawbacks that many people do not realize.  First, even at a lower payment and interest rate, stretching out the payments for several years means you could still pay a lot more money overall in interest.  Remember, getting a lower monthly payment can sometimes cause you to pay more total money.

Home equity loans also use your house as collateral, so you are taking unsecured credit card debt and converting it to secured debt that puts your home at risk.  If you lose your job or cannot make your payments for whatever reason, you run the risk of losing your home in foreclosure.

Still, if you have adequate savings and a stable income/employment situation, consolidating debt with a home equity loan may be an answer for you.

2.  Another common method to consolidate credit card debts is to use balance transfer offers or unsecured personal loans.  You do not need to own a home to qualify for this option, but you typically need fairly good credit.

If you manage to get a low, fixed rate loan or balance transfer offer, this option might make sense.  Still, you need to be very careful and read the fine print.

Most of these offers charge hefty transaction fees, which could erase any savings you may get if you aren’t careful.  Plus, many of the advertised low interest rates are only temporary, and will eventually be raised.  Pay attention to these details, and make sure you factor them into your decision accordingly.  If you can find a good offer, you can still make this option work for you.

Bad Credit Debt Consolidation Options

If your credit is not where it needs to be to qualify for the above options, it might still be possible for you to consolidate your credit card debt….sort of.

3.  A debt management plan through a consumer credit counseling agency allows people with bad credit or who need help to consolidate there payments on credit cards.  You could get lower interest rates and sometimes a lower monthly payment.

That sounds good, but this option is also not fore everyone.  A debt management plan is only for people who are struggling to pay off their debt on their own.  If you have enough income to cover your debt, you are usually better off paying it on your own, especially if your interest rates are not very high.

With a debt management plan, you have to close all of your credit card accounts.  Your creditors can also show that you are in such a plan on your credit report.  While this does not affect your credit score directly, it can make it difficult to qualify for mortgages and car loans.

How Should You Consolidate?

Despite the drawbacks pointed out in this article, you may be able to benefit greatly by consolidating your debt.  The key is to understand your own finances, learn about the options available to you, and figure out which ones will help you and not hurt you.  With the right approach, consolidating your credit card debt could help you get out of debt much faster.

Tags: credit card consolidation, debt management plans, home equity loans, pros and cons, reduce debt