Three steps toward debt reduction

Three steps toward debt reduction

February 28, 2011

Getting out of debt can be overwhelming. You might feel like you’re in a deep hole looking up at everyone else walking by.

Paying off your debt can be a long process when you have many open accounts and credit cards that need to be paid. Where do you begin and what do you do?

Here are a few ideas on how you can consolidate your debt to help you control the payments:

1. Balance transfer

One way to consolidate debt is a balance transfer. You might have a credit card with a large credit limit and a low balance transfer interest rate. Move as much as you can to that credit card. If you have a card with a low limit but low interest rate, move as much as you can from the cards with the highest interest rate to the ones with the lowest. You will still have more than one card open, but you’ll at least be paying on the debt with the lowest interest rates.

Remember, before you do the transfers, make sure you’re saving money. There may be fees associated with the transfers that would make the transfer too costly. Confirm the interest rates and transfer fees more times before making the transfers.

2. Home equity loan or home equity line of credit

If you own your home, you might be able to borrow against the equity in your home to consolidate debt by using a home equity loan or home equity line of credit. There is a big difference between the two: A home equity loan is a closed-ended account that’s repaid over a set time. A home equity line of credit is an open-ended account similar to a credit card that you can borrow against and repay.

The good news is home equity loans and credit lines often have lower interest rates and higher borrowing limits. But there is another side. You’re transferring your credit card debt to the equity in your home. Don’t go and charge on your credit cards once you consolidate your loans into an equity loan or line of credit. This will complicate your problem more.

3. Debt consolidation loan

Debt consolidation loans are solely for combining all of your debts. These loans can be offered at banks or financial services companies. It is wise to seek the financial institution that can help you structure your loan so you can manage the payments within your monthly budget.

Before you consolidate debt, make sure you weigh all the options available to you. Understand the risks associated with your debt consolidation method. Finally, make sure you repay the loans you take out to consolidate debt. Remember, debt consolidation isn’t paying your debt. You still have to do that. When you consolidate debt, you’re just making it easier for you to pay. Consolidating debt could cost you some more money and could take you more time.

Any of the above methods might work for you. The trick is for you to free up enough income and pay as much of your debt as possible. What you’ll need to do is study each debt consolidation method to determine which one works best for you.

Seek advice from a knowledgeable source in the financial industry. Stay flexible and don’t rush into any one method. When you pick which consolidation plan you will use, stick with it until your goal is accomplished and your debt is paid.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 18 years experience in retail banking and with financial institutions in Guam and Hawaii.

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