If you are stretched to the limit of your finances and need to make room to breathe, debt consolidation may be the right strategy for you.

Before giving you the secrets of debt consolidation, it is important for you to understand that debt consolidation can be dangerous. If you are in this mess largely due to a layoff, illness, or other unforeseen financial trauma it is reasonable to hope that you will not find yourself back in this situation. If your debt simply crept up behind you because you've been spending a little more than you make every month until it has become unmanageable, debt consolidation could simply enable you to get into more trouble. Focus on paying off your debt instead.

Debt consolidation is not magic. It does not reduce your debt or make it easy to pay off. Debt consolidation will only make it easier for you to make the payments each month. If you can't make your payments now, it may not just be "nice", it may be "necessary". Here's how you do it.

Credit card consolidation

If you have several credit cards and one has more credit available, a low interest rate, and a low monthly payment formula you may simply want to move your other credit card balances to this card. If you don't have such a card, visit BankRate.com to find such a card. This process is essentially free (the process of consolidating your debt - not the process of paying it back!) and is relatively easy.

Home equity loan

If you cannot get a credit card with good terms, you may be able to get a home equity loan that you can use to pay off your other debt. A home equity loan will typically have a lower rate of interest that is tax-deductible and you can stretch the payments over a long term. If you take out a home equity line of credit, promise you won't use the credit line after you pay it off. Your goal should be to get out of debt, not to find cheaper sources of debt. A home equity line will almost certainly involve some upfront fees, though the bank may add the fees to your loan balance rather than charging you directly.

Mortgage refinance

The ultimate debt consolidation vehicle is to refinance your first mortgage and to borrow more money than you need to pay off the mortgage itself and use the excess to pay off your credit cards and other debts. This is the most expensive option, but would also be likely to yield the lowest total debt payment. If you take out a customary 30-year loan, it also means that you'll be paying for last week's dinner charged to your credit card for 30 years, likely tripling the total cost of that dinner.

Credit counseling

A nonprofit credit counseling service can provide a service that is similar to a debt consolidation, but will ruin your credit, while at the same time reducing the total amount you pay to your creditors. The credit counseling service will require you to pay a lump sum each month to cover all of your debts. They will send all of your payments for you. They will negotiate with your creditors to reduce the interest rate on your debts, reducing the amount that you pay your creditors. The credit counseling agency will also deduct a fee from your monthly payment. Your creditors are required by law to accept the reduced payments, but they are not required to allow you to make any additional charges on your credit cards. They will also report you to the credit bureaus. The impact of this solution is that you will get out of debt quicker, but your credit will be ruined. It will take years to reestablish your credit.

If you are not already deeply in debt, do all you can to avoid getting there. Remember that debt consolidation is a last resort and not a primary financial management tool. As a general rule, you'll pay off your debt faster if you don't consolidate.

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