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Consolidate Your Debts
Debt consolidation involves using new debt to pay off old debt. When you owe too much to your creditors, it can be a good way to lower the amount of money that you have to pay on your debts each month. However, it's not a smart move unless the following guidelines are met:
The total amount that you must pay each month on the new consolidated debt is less than the combined amount that you are currently paying on all of the debts that you would pay off.
The interest rate on the new debt is lower than the rates on the debts that you would pay off.
When you consolidate, you don't trade fixed-rate debt for variable-rate debt. When a debt has a variable rate, the rate is pegged to another interest rate, such as the prime rate as published in The Wall Street Journal. Therefore, when that other rate goes up, the interest rate on your debt goes up, too, and when rate goes down, your rate goes down, as well. Unfortunately, there is no way to predict which direction your rate will move. Worst-case scenario: While you are paying off a variable-rate debt, its interest rate will increase so much that you will end up paying more on that debt than what you were paying before on each of the debts that you consolidated.
You can pay off the new consolidated debt within a three-to-five year period (the amount of time you would have to pay off the
debt if you filed a Chapter 13 reorganization bankruptcy), and you are committed to not taking on any new debt until you do.
There are several ways to consolidate yor debts.
Transfer your credit card balances.
Transferring higher interest credit card debt to a card with a lower rate of interest is a quick and easy way to consolidate. However, don't make such a transfer unless you understand all of the terms of credit associated with it. For example, be clear about how long the lower rate lasts. If it will increase eventually, be aware of what the new rate will be. Also, make sure you understand the amount of the balance transfer fee and any other fees you may have to pay, and be clear about the method the credit card company will use to calculate the minimum amount you must pay each month on the transferred debt. The adjusted balance or average daily balance methods are best. Avoid transferring debt to a credit card that uses the two-cycle average daily balance method.
Use a cash advance from one of your credit cards.
Another quick and easy debt consolidation method is to get a cash advance from one of your credit cards that is large enough to pay off the balances on your other credit cards. (You also can use a credit card cash advance to pay off other kinds of debts, too.) However, because most cash advances have very high interest rates, this method is usually not a wise way to consolidate your debt.
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