Choosing Between Debt Consolidation Options - The Top 5 Options to Choose From

Debt consolidation is not going to make your debt go away and if handled wrong can help as much as rearranging the deck chairs on the Titanic. So what are your options?

1) Credit Card Balance Transfer

If you've been making your payments on time and have a good credit record, you can discuss a lower rate with your credit card provider or simply shop around for a new one that will give you a better rate of interest. By rolling your high interest cards onto the new lower interest card, you can gain some additional flexibility in your finances.

It pays to shop around but watch out for cards with low teaser rates that will rocket up if you are late or miss a payment. You can forestall that by making sure you use an automated payment system so that a payment simply can't be late or missed.

But remember, by closing the higher rate credit cards accounts it will show up on your credit scores so it can have side effects on your overall financial health.

2) Borrow from your retirement account

A workable option depending on your age is taking a loan from your 401K account as long as it is repaid in five years. The drawback with this is that if you lose your job, they must be repaid in full within 60 days or face the early withdrawal penalties from the IRS.

If you're in your early 20′s to mid-30′s a loan of this type is a workable option but as you approach retirement it becomes less and less attractive as a solution.

3) Liquidate other assets or savings

If you have other investments or savings, you may gain more by using those funds to reduce your ongoing debt load. At the current average interest rate on savings of.51% (APY) you gain more from the reduction in your debt on your credit card than you do from sitting on your "nest egg."

The same applies to your CD accounts. If you can apply those funds to your outstanding debts, you gain more in financial relief, and once the burden lifts, you can reinvent the money you're not putting into credit card payments back into a CD or savings account.

4) Borrow against an insurance policy

If you are like many people who have worked at multiple jobs over the years you may have life insurance policies that are just sitting there untapped that could be sold or borrowed against to help with your current financial issues.

Again depending on your age and situation, this may not be the best option to choose. According to figures for 2011 from the Consumers Banking Association, 44% of consumers taking out home equity loans and 35% of the people tapping their home equity lines of credit did so for debt consolidation.

This according to consumer adviser Clark Howard, co-author of "Clark's Big Book of Bargains" is "playing with fire." His opinion is shared with many other consumer and financial advisers such as Ric Edelman, author of "Financial Security in Troubled Times". Edelman advises "You should not have money in assets if you also owe money in debt". He also notes three exceptions to this rule: Mortgages, car loans and student loans. That being said, we can now discuss:

5) Home Equity Loan or Line of Credit

This is the last option and the one that is the biggest potential risk to someone who isn't managing their finances properly. You have to decide if the house is less important than the previous four options given, because taking a second mortgage or line of credit if mishandled will cost you everything. If you use your house as security for a credit line and fail to make the payments, you can be foreclosed.

If you are trying to consolidate your payments to escape filing bankruptcy, once you use your house as security for the credit line, it is not protected under the bankruptcy code and you will lose it as part of the bankruptcy even in the case of a Chapter 13 filing.

Once you do take the step of using your house to pay off the old bills, you have to start breaking the habits that got you into financial trouble to start with. Most colleges and many consumer protection groups offer free courses on money management and budgeting so take advantage of them as you start back down the road to financial sanity.

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