Is consolidation the right option to pay down your debt?

By Good Nelly

Ask Nelly

If you're struggling with a lot of unpaid bills, debt consolidation may be an appropriate solution. This is where you combine your bills into one thereby making a single monthly payment to a consolidation company instead of paying several bills per month to many creditors. Consolidation helps to lower your monthly payment and saves you money along the way.

Is consolidation the right choice for you?

Debt or bill consolidation is an appropriate solution for those who can't meet up with their monthly payments because of high interest rates, late payment fees and over-limit charges. If they enroll in a debt consolidation program, it'll help them obtain low interest rates and an easy-to-manage payment structure through negotiation with creditors. Alternatively, if you apply for a consolidation loan, you can get rid of multiple bills through one large payment. Then you pay back the consolidation loan in small monthly installments.

A consolidation program is right for those who:

• Have multiple bills such as spiraling credit cards, medical bills, payday loans etc.
• Owe a lot of money to several creditors or collection agency.
• Can't keep a track of several bills payable to creditors.
• Can carry on with monthly payments, though at low rates of interest.
• Are on their jobs and have moderate income.
• Wish to avoid filing a bankruptcy.
• Can cut down on their spending and save money to pay off bills.
• Stop charging on their credit cards and avoid incurring additional debt.

A consolidation loan is appropriate for debtors who:

• Have good credit record and income.
• Can't manage several bills and deal with many creditors.
• Wish to get rid of troubled accounts through a lump sum payment.
• Have the financial strength to repay a single loan in small monthly payments.

The best way to find out if consolidation is the right choice for you, is to analyze your financial situation. Most consolidation companies offer a free debt counseling session wherein a consultant evaluates your financial situation and suggests whether you should consolidate or settle your dues. Once you attend a counseling session, you'll be able to find out what's right for you. However, if you'd like to pay off bills on your own, you may check out the DIY section.

Is DIY consolidation or balance transfer a good solution?

If you're in problem with your credit card payments, transferring the entire balance to a low interest card or interest-free card can be helpful. It'll enable you to reduce or eliminate your interest payments. Thus, you can concentrate more on paying down the principal balance.

A balance transfer is most suitable for you if the interest-free period is long enough to help you pay down the entire balance within that period. Otherwise, once the introductory rate period ends and the regular APR starts, you'll end up in debt again as you need to pay much more in interest on the outstanding balance.

While you use a balance transfer card, make sure you don't have to pay a large amount of fee. Read the fine print carefully to ensure that the transfer doesn't wipe out your expected savings.

Whether it is a consolidation program/loan or a balance transfer, if utilized properly, each of the methods can reduce your monthly outgoings and simplify your financial life. With consolidation, you can keep a track of multiple bills and get creditors off your back by paying back your dues within a period of 4-6 years.