Effective Strategies for Debt Consolidation

Many Americans are in debt and more are going into debt every day due to bad spending habits, unemployment, illness and high costs of gas, food, clothing, utilities and housing. Many Americans don't have enough money to pay even basic necessities and have to resort to using a credit card to buy food and gas. This has caused many Americans to owe thousands of dollars in credit card debt. Luckily there are many options available to eliminate or reduce debt. One option that can be used to eliminate or reduce debt is debt consolidation. Debt Consolidation can be done on your own or by using a debt consolidation, debt management company or bank.

Debt Consolidation works by making one monthly payment to a debt consolidation company which is disbursed or divided among your creditors. This monthly payment is usually lower than the total of your individual creditor accounts.

Debt consolidation through a debt consolidation company usually requires payment of a setup fee and/or monthly fee. Debt consolidation reduces the monthly bill, lowers your monthly interest rate and halts charging late fees.

This can be done by: taking out a home equity loan, a home equity line of credit or a debt consolidation loan from your bank. Using your home's equity will also require payment of fees for the home equity loan or home equity line of credit.

The benefits of using debt consolidation are: reduced monthly payments, reduced finance charges, elimination of harassing calls from creditors, convenience of sending in one monthly payment, pay debt down faster, and freedom from stress, worry, and anxiety causes by being in debt. However, use caution when consolidating debt. Start with credit unions that have more favorable loans and terms and find the option that is right for you.

Debt consolidation should only be used under certain circumstances:

• As a last resort
• If you owe $10,000 or more in debt
• If you have high interest rates and high monthly payments
• If you are having difficulty making payments
• If you are getting overwhelmed with paying multiple debts
• If you were unable to negotiate a lower interest rate

When shopping around for a debt consolidation loan consider the following factors:

• Fees
• Reputation of the company
• Interest rate
• Terms of loan
• Length of loan
• Monthly payment
• Fine print

Consider the following risks: 

• Once you signed up for a debt consolidation loan you can’t change your mind.
• You may have to pay high interest rates and fees if you have bad credit.
• The repayment plan may be longer which will cause you to pay more interest over the life of the loan.
• If you miss a payment you may have to pay penalties and your interest rate could be increased.