“Debt consolidation.” It has such an alluring ring to it. It creates this fantasy that you can wrap up all your debts into one attractive, low interest package, and everything will be hunky dory with your debt. Sadly, the easy quick fixes are often rather bad for you, financially and credit worthiness-wise.
This glorious idea of an easy fix to being thousands of dollars in debt has been fertile soil (fertile with manure) for an entire industry with fabulous claims of lower monthly payments, low interest rates, and zero hassle.

You know what they say about something being too good to be true though…

So before you jump feet first into debt consolidation, be sure you’re aware of a few things.

• Debt consolidation companies are not nonprofit organizations, they won’t improve your credit, and they won’t do anything you can’t do yourself. Here’s the deal, from an industry insider: you gather all your paperwork and send it to them, they tell you how much to pay them each month, then they’re supposed to negotiate lower payments and interest with your creditors and make the payments for you. The reality is they are notorious for paying your bills late, destroying your credit, they take 10-20% of what you pay them each month for “administrative costs” (it’s not profit, they’re a nonprofit organization, remember), and they once again can’t get better rates than you can by spending some time on the phone with your creditors. Some of the worst of them will even purposely let your debts charge off so they can negotiate a better settlement on your debts once they’re turned over to a collection company, allowing them to take a portion of the money they “save” you. Believe me, with the hit your credit will take by doing that, and the resulting higher interest rates and fees you’ll have on everything after that due to your abysmal credit, you’re not saving anything.
• So what if you’re not going with a debt consolidation company, but are instead getting a debt consolidation loan? Well, that is a much better option, but it’s still not a good option. First of all, chances are good you’ve got some dings on your credit already if you’re looking for a consolidation loan, so the chances of you getting a loan are pretty slim, and if you do get the loan, your interest rate isn’t going to be better than the cards you’re paying off. So you get the convenience of one payment, but no monetary savings, and that’s what this is supposed to be about, saving money, not just convenience. So don’t believe the promises of easy money, it’s just a lure to get you in the door like a wide mouth bass.
• What about flipping your debt from card to card chasing the no interest balance transfers? Well, it’s bad for your credit, the banks will catch on and cancel the cards, it’s illegal, and there is the little thing of our failing economy and the fact that those zero percent interest cards just aren’t available anymore. This solution is so… 2007. Reality caught up to this plan about a year ago.

So what should you do?

• Get a home equity loan. This will have a low interest rate and the interest will be tax deductible. You’ll have the up-front costs of origination fees, insurance, and an appraisal. Warning though, this isn’t as easy as it once was before the mortgage crisis, but if you’re lucky enough to still have equity after the freefall of housing prices, this is an excellent option.
• Negotiate with your creditors on your own. Remember the credit card industry is “losing” tons of money right now because the impending enforcement of the credit card reform act, so they’re probably going to be more willing to bend to keep the paying customers they still have. This gives you leverage. They want you paying, and paying them, not defaulting or taking your business to another bank.
• Refinance your home, cashing out your equity. This is different from a home equity loan and will give you lower monthly payments because you’ll probably get a longer loan term than a standard equity loan. Keep in mind though; this is going to cost you more in the long run because you’re extending the length of your mortgage without lowering the price of the home. If you can get your credit cards debts paid off though, and then apply all or a portion of what you were paying the credit cards companies toward your mortgage, you can minimize or overcome the damage though.
• If you have somehow weathered this without destroying your credit already, a personal loan from a credit union might be an option. You’ll get interest rates in the 10-15% range most likely, but that’s still better than the 24.99-29.99% you’ll be paying on credit cards these days.
• If the situation is truly dire, you might also want to consult with an attorney. It’s sad, but true, that is some situations bankruptcy might be your best option. I strongly advise seeking legal advice before going down this route though.
• Last, but certainly not least, there’s the hardest, yet easiest option. Living within your means. Paying off your debts can be accomplished by putting more money toward them each month. That might mean cutting back on eating out, getting rid of the 300 channels of cable since you probably only watch 3 of them anyway, maybe carpooling to save gas, get a second job, etc. Make a personal budget, find where you can cut back, and put that money toward the bills. This doesn’t require loans or lawyers or anything else because it easy, but living within your means can be so hard. It takes self control and determination, but the rewards are great.