In effect, multiple debts are combined into a single, larger piece of debt, usually with more favorable pay-off terms: a lower interest rate, lower monthly payment or both.
Consumers can use debt consolidation as a tool to deal with student loan debt, credit card debt and other types of debt.
Home equity loans or home equity lines of credit are another form of consolidation sought by some people, as the interest on this type of loan is deductible for borrowers taxpayers who itemize their deductions.
There are also several consolidation options available from the federal government for those with student loans.
For example, refinancing a mortgage for credit card debt can be incredibly helpful.
Credit card debt tends to be some of the most expensive in terms of interest rates, with many cards charging upwards of 12-20 percent interest.
When done correctly, people are able to save thousands of dollars a month, not only in interest rates, but also in tax breaks you only get on mortgages.
When it comes time to pay the next card off, you can use what you ordinarily would have put toward the first card and pay off a bigger amount of the second card.
Typically, this makes it possible for borrowers to pay off debt a lot faster and can get you back on track. Don’t use too much on entertainment or going out to dinner.
When all your cards are maxed out, you have zero percent of your credit available.
By paying off cards and then closing the accounts, you actually just end up with zero percent of credit available again.