Making Debt Consolidation Work
If you're paying high interest rates on several cards, you may want to consider consolidating your debt to save money and simplify accounting.
Homeowner Options
If you own a home and have some equity in it, you have several relatively low-cost options.
Refinancing. Today's rates are low enough that refinancing can still be a good deal. The downside is that you'll be using your home as security for what used to be unsecured debt, and if the new payments add too much to your budget, you risk losing your home. You must also pay fees and closing costs, so do the math carefully before choosing this option.
Home Equity Loan. This loan lets you borrow against your home's built-up equity. Home equity loans are often used to consolidate debt because they are for a fixed amount, you receive one lump sum, and the payback amount and term doesn't change.
Home Equity Line of Credit. This credit line is based on the equity you've built in your home. You can draw a little out over time up to your credit limit, or use it all at once to pay a large debt. Your payments vary depending on your balance and the fluctuating interest rate.
Borrowing against the equity in your home is a big decision because it's probably your most valuable investment. Be careful you're not just digging a bigger hole when you pay off your credit cards. It's easy to fall back into debt quickly…adding an additional mortgage payment to that burden could jeopardize your home.
Additional Options
Balance Transfer. A balance transfer to just one credit card with a high limit and low interest rate may save you money in the long run. Read the fine print carefully, however, because some balance transfer offers are for a limited time, or your preliminary low interest rate will rise dramatically if your credit score goes down.
Personal Loan. You may qualify for a personal loan with your credit union. Often, this is an excellent alternative if you have a few high-interest credit cards you want to consolidate and pay off, but don't want to borrow against your home or open a new credit card.
