Many debtors must take out new loans or open up additional lines of credit to pay off their debt. This leads to a vicious cycle, where you finish paying off one debt, only to fall back into debt because you cannot make payments on your new loan or line of credit.
One of the most effective ways to eliminate this cycle of debt is through debt consolidation. With debt consolidation, you take all your existing debt and combine it into a single, consolidated plan.
Under this new plan, you still owe the same amount, but having all your debt consolidated into one new plan means you are only paying interest on one source.
Additionally, it becomes much easier to budget and keep track of your debt, since you do not have to consult multiple payment plans.
Consolidating your debt works best for longer term plans. In many cases, you must offer some form of collateral when you create a consolidated plan, especially if you have a poor credit score.
Your main goal when consolidating your debt is creating a new payment plan with more favorable rates. Since all your debt is now under a single plan, it is important you get reasonable interest rates, otherwise, you risk falling further into debt.
There are two primary ways to consolidate your debt. The first is to get all your debt transferred onto a credit card, with many companies offering zero percent interest cards. Your other option is to get a fixed-rate debt consolidation loan.