Debt Basics: Should I Consolidate My Debt?

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Should I consolidate my debt?

You may have heard a lot about debt consolidation recently and been wondering, "Should I consolidate my debt?" The answer is: it depends on the type of debt you have, your credit rating, and your ability to pay.

Should I consolidate my home loans?

This is another "it depends" question. If you have a mortgage and a home equity line of credit, it may not be to your advantage to consolidate. A line of credit improves your financial flexibility. On the other hand, if you have a mortgage and a home equity loan with a higher interest rate than those that are currently being offered, consolidating them into a new first mortgage with a mortgage refinance loan can reduce your total interest costs and also lower your monthly payments. However, factor in closing costs and refinance fees before consolidating. In some cases, refinancing will cost you more than you would save by consolidating.

Should I consolidate my student loans?

If you have more than one federal student loan or more than one private student loan, then consolidation is an excellent idea. Not only will it simplify your payments, but you may receive a discount for signing up for automatic payments. Although the consolidation will stretch out the term of the loan, there are no prepayment penalties, so you can continue to pay the same amount you did before the consolidation if you want to get the interest reduction and also pay the debt down quickly.

There is one time when consolidation isn't an option, however. Spouses are no longer allowed to consolidate their student loans together. This preserves the ability to cancel one person's loans upon death or permanent disability, which is not possible when loans from two people are consolidated together.

Should I consolidate my credit card debt?

If you're carrying multiple credit card balances, it's almost always wise to consolidate them. You can opt for a home equity loan, which will drastically reduce the interest rate and probably get you a tax deduction. Be careful that you don't overborrow though, because you are risking your home by opting for a loan. You should also avoid creating new debt while paying down a home equity loan.

If you're not comfortable borrowing against your home to pay off credit card debt, then a balance transfer is the next best option. These offers usually have a very low interest rate for a limited time. Pay as much as possible toward the consolidated debt every month. If you have a 0% transfer for 12 months, then 100% of your payments will go toward the debt rather than the interest. For many people, this is a significant savings and allows them to finally get out of debt.

Finally, if you can pay off your credit cards in less than six months, then consolidating is probably not necessary. Although it may save you a few dollars in interest, the transfer fees may cancel out any savings.

If you're tired of receiving numerous bills and want to streamline your financial life or save money, then consolidation is usually a very good way to do both. Before you opt for consolidation, carefully consider the costs and benefits and then make the best choice for your situation.

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