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Should You Choose Debt Consolidation?

Stress over credit card's billDo you feel as if you’ve fallen into a huge pit of debt and you’ve decided that you need to do something about it? An article appeared recently on the Bank of America website that raised some interesting questions you might want to answer before you decide to consolidate your debts.

Three ways to consolidate debts

There are three very popular options for consolidating debt. They are credit card balance transfers, a home equity loan and an unsecured line of credit. Here’s how a credit card balance transfer might work for you. Suppose you have three credit cards with an average interest rate of 20%. You might be able to transfer the balances on these cards to a new one with, say, a 12% interest rated. It would be even better if you could qualify for a 0% balance transfer card. If so, you would have anywhere from six to 18 months of 0% interest so that all your payments would go towards paying down (or paying off) your balance.

Home equity loan

If you have equity in your home, you might be able to get a home equity loan or homeowner’s equity line of credit. Either of these would certainly have a lower interest rate and a lower monthly payment than your credit cards. And the interest you would pay is probably tax deductible. However, be sure to understand that the payment you’d have with either of these alternatives is in addition to your mortgage payment and not in place of it.

An unsecured line of credit

If you don’t have enough equity in your house to get a home equity loan, you might be able to get an unsecured line of credit (USLOC). This type of loan requires no equity. It’s similar to a credit card in that you are allowed to access a line of credit with the idea that you will pay back the money on time and with interest. The difference is that you don’t actually get a credit card.

Think cautiously

Before you decide to consolidate your debts, think carefully. You need to ask yourself questions like “will the new loan end up costing me more in the long run.” It’s also important to learn if the interest rate on that new loan or balance transfer will change over time. This is because there are variable interest rates that can go up and down depending on an index such as the Prime Rate.

Is there an expiration date

Some interest rates have built-in expiration dates such as six, 12 or 18 months. This is always true of the 0% interest balance transfer cards. Before you transfer any balances make sure you know when that great interest rate will expire and what your new interest rate will be. Some credit cards charge balance transfer fees (often 3% of the amount being transferred) so be sure to know about this before making any transfers.

What is the term of the loan?

If you elect to get some kind of debt consolidation loan, be sure to know its terms or how long it will take you to pay it off. You should also ask if there will be additional fees, penalties or charges if you decide to pay off your balance early and what happens if you miss a payment.

Get help

Once you’ve answered these questions you might actually decide to keep your current loans. The net/net is that some serious number crunching may be required before you can determine which option would be best for you. If math is not one of your strengths, it might be a good idea to ask a skilled financial advisor for help.

You can read the complete article on the Bank of America website by clicking here.