Tuesday, January 18, 2011

Four Ways to Consolidate Debt

Robert Zangrilli is the CEO of Franklin Debt Relief, a leading debt reduction service for consumers.

When you’re carrying balances on several different credit cards, the majority of your monthly payments goes towards interest. Only a small portion of your payments actually goes towards reducing the existing balance. Consolidating all of your debt into one payment enables you to pay down the balance more quickly. There are several different ways to accomplish this.

Consolidate Into One Credit Card
If one of your credit cards has enough available credit, it might save you money to transfer the balance of all your other credit cards onto it. To determine if this option is right for you, you’ll need to consider the interest rates on all your cards. If you have several credit cards with low balances and are paying a special introductory interest rate of five percent, you’ll ultimately end up spending more by moving that debt to a card with an interest rate of 14 percent. The best option would be to move all of your existing debt onto the card with the lowest interest rate.

Use the Equity in Your Home
Home equity loans and lines of credit usually offer a much more competitive interest rate than credit cards. And because they’re secured by your home, these types of loans usually offer a higher borrowing limit as well. A home equity loan is very similar to a traditional mortgage with a set start and end date, while a home equity line of credit is like a credit card where the balance can be reused as it’s paid down. These are excellent options for credit card debt consolidation with one caveat: if for some reason you can no longer make payments your home would be at risk of foreclosure.

Borrow from Your Life Insurance Policy
If you have a life insurance policy, you might be able to borrow against its cash value. Most insurance companies will not require you to make monthly payments on the loan as long as the amount you’ve taken is less than the cash value of your policy. Once your debt is under control, you should pay back the loan on your life insurance policy as quickly as possible. Otherwise, your death benefit will be reduced by the amount of your loan, and your survivors may not receive the money they need to make ends meet.
Borrow from Your Retirement Fund
Many retirement plans provide for loans at enticing interest rates, but there are some significant drawbacks to consider. The loan must be repaid within five years or you will be hit with penalties on your income taxes. If you change jobs, the loan will be due within two months or you will also be hit with penalties. As a result, this method of debt consolidation should be considered as your last option.

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