Business & Finance Bankruptcy

Difference Between Debt Consolidation & Debt

    Debt

    • In simple terms, any money you owe is debt. You may have credit card debt, or debt in the form of a mortgage, vehicle loans or student loans, for example. The amount of debt you carry accounts for roughly one-third of your overall credit score. If you're carrying high balances in relationship to your credit limits, you're hurting your credit score.

    Debt Consolidation

    • Debt consolidation is a method that people use in hopes of combating their debt faster. Individuals have a range of debt consolidation options to choose from, including debt consolidation loans, home equity lines of credit and 0 percent interest rate credit cards. These methods all fall under the term "debt consolidation" because you can gather up multiple debts under each so that you only have to make one monthly payment rather than multiple payments. Although debt consolidation is a tool to combat debt, it is also another type of debt.

    Warnings

    • Since debt consolidation actually adds to your debt, it may be a dangerous strategy if you have problems with overspending. Whichever debt consolidation method you choose, it will wipe out the balances on the debts that you consolidate. However, debt consolidation is like fighting fire with fire. According to credit union manager Chris Viale, 70 percent of those who use debt consolidation end up with the same or more debt within two years.

    Considerations

    • You may find more success paying off your debt by requesting lower interest rates on your credit cards and then following through with a payment strategy than by utilizing debt consolidation. With a home equity loan, you could lose your house if you fail to pay. With a 0 percent interest credit card, the introductory rate comes to an end and you will have to pay interest on the remaining debt. And with a debt consolidation loan, you may not qualify for the ultra-low advertised interest rates. By negotiating lower interest rates and either paying off the card with the lowest balance or the highest interest rate first, then moving through the cards progressively, you will attack your debt without being at risk of falling deeper into debt.

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