Living on credit has become a way of life for most people. Using your credit card to pay for everything may seem convenient. However, if you don’t make the payments on time, you will be facing rising interest rates that can put you in a debt trap.

Depending on the number of loans and credit cards you have and your debt-to-income ratio, you can consider various debt relief methods.

When should you consider debt consolidation?

If your total credit card loan outstanding and your bills are just a small fraction of your monthly income and you are meeting all the monthly payments, you should not be considering a consolidation option. Debt consolidation gives you the convenience of making just one single payment, instead of making payments to several different creditors. However, the convenience of a single bill should not be the driving criterion for a new loan. Just maintain your good financial habits and you will soon be debt free.

If your debt-to-income ratio is around 50%, then you can consider a debt consolidation option. You can look for a good loan and pay off all your high interest debts and just make one monthly payment to this bigger loan, in place of the multiple payments you were making.

Debt consolidation – The options

You can consider credit cards balance transfer to a new zero percent or a lower interest rate credit card. You can take debt consolidation loans – unsecured or secured. You can seek the help from a non-profit debt counseling agency.

Lower interest or zero percent balance transfer

Are your debts in the form of high-interest credit card dues? If you have a good credit score and are making payments on time, you have a good chance of getting a zero percent balance transfer to a new credit card. The zero percent interest rate is generally an introductory offer that might last for a few months or up to one year.

Stick to a plan to pay off all your credit card dues within this low-interest period. If your repayment schedule extends beyond this period, you can be looking at interest charges of anything between 13% to 27% and you will risk getting into unmanageable debt again.

Plan on curbing your use of the credit card. Use it as sparingly as possible and focus on paying off all your debt within the short time-period you have. Once you clear your debt, don’t go back to your old habit of maxing out your credit card again.

Unsecured debt consolidation loans

If your debts are becoming unmanageable with many different bills, you can try to get a loan for debt consolidation from a bank or credit union. A normal personal loan can also help; but if you specifically apply for a debt consolidation loan, you may be able to get more favorable terms.

However, you need to have a good credit score to get a loan from this first line of creditors. If a bank or credit union won’t give you a debt consolidation loan, you can try to find a good private finance company that will not be so strict about credit scores.

Many lenders can offer you a debt consolidation loan at low interest rates, but the repayment period can be much longer. In this case, you may end up paying a much larger amount as interest payment on the debt consolidation loan than the total interest payments on all the loans you are trying to consolidate.

If you are able to find a good debt consolidation loan, follow a disciplined plan of repayment. Don’t miss monthly payments. Cut back on your monthly expenses to pay off this loan on time.

While taking a debt consolidation loan can affect your credit rating, paying off the loan on time will eventually improve your credit score.

Secured loan for debt consolidation

You can use an asset you have, like your house or your retirement savings, to get a loan and use this to pay off your outstanding unmanageable debts. You then focus on repaying the secured loan on time, keeping up with the repayment schedule.

Remember that if you are unable to manage your finances well and miss many payments or completely default on the loan, the lender can seize the asset you have pledged to redeem the due amount. Only take secured loans if you are sure that you will be able to keep up with the monthly payments and clear the loan on time.

Debt consolidation agencies

Another debt consolidation option is to look for a debt consolidation agency. However, many of these companies can be fraudulent. They offer to negotiate with your creditors and get you favorable terms. You then make one single payment every month to the debt consolidation agency, and they pay the creditors. But, many of these companies ask for upfront payment towards fees for their services, before they will start paying off your debts. Once they have collected their fees, they may not offer you the promised service.

Look for good non-profit debt consolidation services. They will study the debts you want to consolidate, look at your income and expenses, and come up with a plan to pay off your current outstandings. They can speak with your creditors and try to secure a lower interest rate or waiver of late fees and other charges to lower your dues.

Your debt counselor could advise you on which debts to pay off first. You will also generally get a financial education on developing good financial discipline and how to curb your spending and stay free of getting into debt again.

Consider various debt consolidation options and choose one that suits you best. Pay off your debt and practice financial discipline.