It’s hard to resist the temptation of all those credit card offers arriving regularly in your mailbox. There are over 1.2 billion credit cards in use in the United States, and the credit card industry took in $43 billion in card fees in 2003.² If one card is good to have, then having six cards must be better, right? Add in mortgage payments, a car loan, student loans, unexpected medical expenses, and pretty soon you’ve got more bills with different payment schedules than you can effectively manage. A missed or late payment here, increased interest rates there–maybe it’s time to get a handle on your money management by consolidating your debt.

Simply defined, debt consolidation involves rolling all your smaller loans and debts into one larger loan. This can be accomplished in several ways: taking out a home equity loan or line of credit; transferring existing credit card balances to a new low or no interest credit card; or a debt consolidation loan. There are also credit counselors and debt management programs available. Which is right for you? Let’s explore the options more closely.

Home Equity Loan/Line of Credit
If you own your own home, you may be able to take out a home equity loan or line of credit to help consolidate your existing debt. These loans are relatively easy to obtain, inexpensive, and the interest on the loan is generally tax-deductible, making this a very attractive option for some people. The risk of using your home to secure the loan, however, is that you could lose your home if you default on the loan.

While similar, home equity loans and a home equity line of credit have significant differences. The home equity loan is a single lump sum loan with a fixed rate of interest and a repayment schedule that is the same amount each month. A home equity line of credit works more like a credit card. A maximum available amount and a time limit are established by the lender. You can borrow money as you need it during that period up to that maximum. As you repay the principal, your credit recycles and you can use it again. For example, let’s say you have a $10,000 line of credit. You borrow $5,000, and then repay $3,000 toward the principal. Now you have $8,000 available to borrow. The interest rate on a line of credit isn’t fixed, and may fluctuate during the life of the credit line.

Credit Card Transfers
If you don’t own your own home, you might consider transferring your existing credit card balances to a new low or no interest credit card. The marketing of these cards is everywhere – on television, online, and in your mailbox. Read the fine print before you make your move. The really attractive rates are reserved for those with great credit ratings. If your credit is less than stellar, you’ll probably start out at a higher rate. Many of these cards offer the low introductory rate for a short time frame, like six months, after which the rate can increase dramatically. Know what that higher rate is going to be and when it kicks in, and what other charges and fees there may be to transfer existing balances. It may only make sense to make this move if you can pay off your debt before that introductory period runs out. And generally, those low rates only apply if you pay on time – one late payment, and you may see that rate jump. Shop carefully for the best terms and be determined to pay off your debt as quickly as possible.

Debt Consolidation Loan
Another option is to take out a regular bank loan. This type of loan is another option for consolidating all your payments into one lower payment. In fact, some lenders offer loans specifically for this purpose. The convenience of paying one lender one payment once a month (and at one interest rate), rather than 20 different creditors (with 20 different amounts due at 20 different times of the month) is very attractive. However, convenience doesn’t always mean savings. Again, do your homework first to be sure that the new single payment is really better than what you’re paying now on all your different debts. And shop around to different banks and credit unions to find the deal that’s best for you.

Credit Counseling/Debt Management Programs
Depending on the scope of your debt situation, you might benefit from professional credit counseling. Credit counselors will help you break your bad spending habits and change your credit behavior by making you face up to your situation. They’ll help you establish a budget and get on track to clearing up your debt load. And like any behavior change – losing weight or quitting smoking, for example – you have to want to do it, and have the discipline to follow through.

If your financial problems are severe, your credit counselor may recommend that you enroll in a debt management program. In a debt management program, your counselor works out a payment schedule with you and your creditors that may involve lowered interest rates and waived fees. You deposit money each month with the counseling organization, and they pay your creditors. A potential downside to a debt management program is that it may show up on your credit report as a negative mark. Also, some agencies offer free services, while others charge for their help. Make sure you understand their terms completely before you sign any contracts. The Federal Trade Commission offers a non-biased discussion of various kinds of credit counseling at http://www.ftc.gov/bcp/conline/pubs/credit/fiscal.htm.

Regardless of which debt consolidation approach you’re considering, keep in mind:

• Is the interest rate on the consolidating loan or new card less than the average of all the interest rates you’re currently paying?
• Will your new monthly payment be less than the sum of all your current monthly payments?
• If the term of your consolidating loan is longer than the terms of your existing debts, you may end up paying more in total interest charges even if the rate is lower, so you may wind up paying more over time than you would have otherwise.
• If you use a longer term loan, it will take you longer to pay off your debt.
• Sometimes you can negotiate with your individual creditors for reduced payment programs to help you through a temporary rough spot if you ask.
• Shop around carefully. Rates and terms vary considerably. Read the fine print.
• If you’re considering a credit counseling service, check with the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling to see if they’re a member of either group. Contact your state’s Attorney General, your local consumer protection agency, and the Better Business Bureau, too. Ask for references and check them out.
• For more information, check out Bankrate.com’s Guide to Consolidating Your Debt at http://www.bankrate.com/brm/news/debt/debtguide2004/consolidating-debt.asp. This site features articles, interactive quizzes, and calculators to help you get started. 

¹ MacInnes, Jay, “Drowning in Debt.” TroubledWith.com, a service of Focus on the Family, 2002.

² Bannister, Paul, “25 Fascinating Facts About Personal Debt.” Bankrate.com’s Guide to Consolidating Your Debt, Sept. 20, 2004.