Debt consolidation is simply the process of paying off your current debt by borrowing an amount of money from one source and then repaying this new source. It has several advantages: simplifies your payment, can save money by lowering the interest rate and even get some of your existing debt forgiven and it can help your credit by allowing you to avoid being delinquent on debt repayment. However, there are plenty of scams out there that can end up costing you more money and ruining your credit - so it makes sense to thoroughly research your options.

If you've worked on your budget (as suggested in "Managing Your Money") and have been unable to persuade your creditors to create a repayment plan that works for you (see "Quick Debt Relief"), then your next step should be to research your debt consolidation options. There are many ways to consolidate your debt. We'll describe some of the most popular and provide some links to get you more information.

This is basically paying off your credit card debt by transferring the balance to one credit card. It can be an effective way to lower the interest rate that you are paying. However, there can be difficulties with transferring your balances - including extra charges. Plus, you should be sure that the interest rate that you are transferring to is not a temporary promotional rate.

By working with your bank, you can borrow money against the equity of your house. You should get a pretty low interest rate these days. Be careful, if you default on paying back this loan, you could lose your home. Be sure to know how your home should be valued and watch out for extra fees.

If you have a 401K plan, you can usually borrow money from it (with a reasonable interest rate - and the interest is actually being paid back into your 401K account). Worth considering if you're young and you really need the cash. However, it's dangerous to borrow against retirement savings.

If you have a cash life insurance policy, you might be able to take out a loan against it. The repayment interest will typically be lower than commercial rates. Again, be careful when considering this option. Remember why you have life insurance in the first place - so that your dependents will be able to get by if you pass away. If you take money out of the policy, your dependents will receive less if you die pre-maturely.

This could turn out to be a great move. There are nonprofit institutions that will provide educational services to help you budget, take immediate steps to reduce and consider debt consolidation and bankruptcy if necessary. Click on the link above to learn more about how this process works.

Your bank or an independent company can provide a consolidating loan to you. They may also be able to talk to your creditors and get the amount owed reduced. Be careful that you're comfortable with their tactics. Some debt consolidators will tell you to ignore creditors until they give up. They might give up trying to collect but they will severely damage your credit report. Always check businesses with the Better Business Bureau and ask to speak with some former clients. There is a decent amount of fraud reported in this industry.

Please note: This website is designed to provide you with information about debt problems. However, this information should not be relied upon. The information does not constitute professional or legal advice. We also cannot take responsibility for content on sites that are linked to from our pages. Always obtain proper legal and other professional advice before undertaking any significant action.