Debt Consolidation

How does Debt Consolidation work? What should one consider while going for Debt Consolidation?
Debt consolidation is a form of debt management that allows you to group all of your debt together into one single huge debt. If you have three high interest credit cards and a personal loan, you may be finding it difficult to pay make the monthly payments on each of these. And also, the payments you are making will most probably be only the interest on the loans. But debt consolidation is one way you could achieve a semblance of control over your piling up debts. In this, you would take all of those loans and consolidate them into one loan. 

There are several ways to go about the consolidation process. You could: 
• Negotiate a lower interest rate from one of your credit card lenders and transfer all of the balances onto that card 
• Take out a lien against your mortgage 
• Work with a credit counseling company 
• Take out a debt consolidation loan from your bank or credit union. 

Some popular forms of debt consolidation:
Home equity loan or line of credit: Home equity loans often are seen as a quick and easy way to get out of debt. By leveraging the value of your home, you can get money to pay off other bills and it could earn you a tax break, too. The main risk in securing a home equity line of credit is that you could lose your home if you default on the loan. 

Zero-percent credit card: Credit card companies offer these rates as enticements for you to switch credit card vendors. The low rate lasts only if you pay on time. One late payment and the credit card company will increase the rate. Also, make certain to look for hidden fees and charges that can increase the actual cost of credit. This kind of offer is typically an introductory offer that will last for a short time. Make sure you know when it will end and what the rate is expected to be. Some debt laden consumers open new credit card accounts every six months hoping to cash in on the low interest rates but doing this could negatively affect your credit rating.

Debt consolidation loan: In this type of consolidation loan, instead of paying 20 different creditors who are charging different rates at different times of the month, you take out one big loan and pay off all those accounts. Then you make a single interest payment on that big loan once a month. But it does not mean that it is the best solution to your credit problems. Make sure that the costs of the new, bundled loan will be less than what you are already paying various creditors. Unless you can get a low interest rate that will help ease your monthly payments, there is not much point in taking these kinds of loans. Calculate interest and fees on all your existing accounts to determine the total of the payments you now make and then compare those amounts with the consolidation loan. 

Credit counseling: Instead of shifting a debt from many to one, you should explore credit counseling. Getting professional help in managing your debt can help you change your credit behavior. Credit counseling agencies also force you to stop adding to your debt. 

However, there are many credit counseling and debt-consolidation companies that are only interested in making quick money on debt-ridden consumers. Some firms offer shoddy service at sky-high fees while others turn out to be out-and-out scams.

To find a reputable firm, here are some steps you can take:
• Verify certifications and check with the Association of Independent Consumer Credit Counseling Agencies or the National Foundation of Credit Counseling.
• Ask for references and then confirm them. 
• Make sure that the debt management or credit counseling firm answers all your questions and that you understand how the process will work and what it will cost. 
• Shop around