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Eliminate your financial woes: Do's and dont's of debt consolidation

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By: Phil Bradford
on 19th Feb,2016

Usually, consolidating debts seem to be an apt way to get your financial troubles under control.
Eliminate your financial woes: Do's and dont's of debt consolidation

Usually, consolidating debts seem to be an apt way to get your financial troubles under control. All you'll have to do is get your balances rolled into a single loan and then pay it off through one monthly payment, till the time you're debt free.

Though there isn't any proven option for debt consolidation, yet there are possibilities for you to narrow down to a suitable alternative depending on your individual financial condition.

Debt consolidation options you may consider

Following ways to have your debts consolidated can suit you well, only if they're backed by proper research and understanding of what each one of them entails.

Credit card consolidation

In this case, you can take advantage of a 0% balance transfer card or a low-rate credit card so as to have your costly, outstanding loan balances consolidated. However, you need to take caution as these debt elimination options come with strings attached, i.e., you may be charged with a fee for every balance you transfer. Any transfer fee usually costs around 3-5 percent of every outstanding balance amount transferred.

Moreover, if you're using balance transfer cards with teaser rates (also known as introductory rates), then those rates won't last for long. Instead, they come with a predetermined expiry date. Take for instance, balance transfer offers with considerably very low rates may charge you to the tune of 0-3.99 percent. Such bank cards usually lasts for about 12-18 months. Post that, annual percentage rate or APR can change dramatically.

One more thing that you must keep in mind is that if you plan on using a single credit card for consolidation purpose, then you may end up with using a sizeable portion of your accessible credit. This move, in turn, can have negative impact on your credit scores, particularly till the time you've paid off all your debts.

So, it is quite obvious for you to weigh the amount of effect that having your balances transferred to a single card will have on your credit as opposed to the amount of money you're likely to save in the process.

When is it most suited to opt for a balance transfer card?

Basically, debt elimination option like this would be most suitable for someone who's eligible for a low-rate balance transfer offer that also charges low transfer fee. Moreover, it should help in to pay off all the debts much in advance of the teaser rates' expiry.

Additionally, it'll be a lot more helpful, if there isn't any more balances or extra charges levied on the card, while the transferred balances are being repaid. Or else, too many rate of interests can make it a challenging task to stay on the right track of the required amount that you may need to get rid of all the balances that you've transferred.

B. Retirement account credit

This is another way by which you can have your debts consolidated. If you have hordes of cash stashed away in one of those tax-deferred retirement accounts like 401(k), 403(b) or any other pension plan, then you may take out those funds as loans at comparatively cheaper rate of interests. Here, you'll be paying back the interest back to your own account, instead of to a lender.

Luckily, there isn't any credit check done to qualify you for such loans. Hence, it is quite easy to get them. However, there are several shortcomings of using your retirement nest egg to pay off your debt, even though they are quite easily available to you. First of all, you'll have to pay taxes as well as penalties, in case you fail to make repayments as per the loan agreement. This is similar to withdrawing money from those retirement accounts.  

Apart from that, by using your retirement fund for debt repayment, you run the risk of jeopardizing your own financial security during the golden days of your life. This is because you aren't investing those money anywhere that might bring in some handsome returns.

Still, the most intriguing part in using retirement funds for various things other than retirement is that consumers like you who've done that to bail themselves out of the vicious cycle of debt, unfortunately end up being bankrupt.

Therefore, if you're contemplating to use your 401(k) or 403(b) funds to roll your loans into a single debt obligation just because you're getting overwhelmed to manage them, then you should consult a credit counselor and if possible, then a bankruptcy attorney too before actually making any such move.

What is best option suited for you?

In case, you've been turned away for a low-cost consolidation loan, then this could be your best alternative to have your debts consolidated and get rid of your financial obligations in an efficient manner. By this time, you've already consulted and had a word with a credit counselor and a bankruptcy attorney to determine the best course of action for debt relief.

It is very likely that they've advised you against the use of your retirement funds for debt consolidation purpose since they're not a good option. Interestingly, there isn't any risk of defaulting on the loans for which you're the lender, even if you lose or leave your job, for instance.

As evident, these kinds of scenarios are very stressful and to be in one of them will narrow your debt relief options. So, considering the state of your financial affairs, you may use retirement loans as one of the most affordable means to borrow and pay back debt, both at the same time.

Finally, you shouldn't play ostrich and run away from your liabilities by leaving them unattended or ignoring collection calls, if you're behind on your debts. This is because avoiding collection calls or leaving bills unopened won't resolve your financial woes, rather it'll aggravate them. Your lenders will make sure that they get back their due and might even drag you to court for that matter.

Check out: Clear your mind off myths before going for debt consolidation

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