How to Consolidate Debt

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Combine your debt into one manageable chunk to minimize interest rates.

Step 1: Avoid debt-consolidation firms
Stay clear of debt-consolidation firms. They can’t do anything for you that you can’t do yourself.

Tip
Remember: Debt-consolidation firms that advertise themselves as 'nonprofit' are not necessarily free.

Step 2: Call your creditors
Call your credit-card companies and try to negotiate lower interest rates. Be persistent – if they say no, ask to speak with someone else, or call back in a few weeks and ask again.

Step 3: Investigate new cards
Check around to see if you can get a new card with a promotional rate of six months to a year of no interest.

Tip
Read the small print! Don’t sign up for a card that reserves the right of 'no-reason rate increases' or 'universal default,' which means the company can raise your interest rates simply because you owe money to other creditors.

Step 4: Transfer balances
If your lowest-interest credit card has available credit, consider transferring other balances to that card. But do some number crunching first: Exorbitant transfer fees might make debt transfer pointless.

Step 5: Apply for an unsecured loan
Shop around for an unsecured debt-consolidation loan with a lower interest rate than that of your lowest-interest credit card. If you qualify for one, pay off your credit cards with the loan. Just be aware that they are nearly impossible to obtain in a tough economy.

Step 6: Apply for a home-equity loan
If you own a home, consider applying for a home-equity loan or line of credit; the interest you pay is often tax-deductible. Just make absolutely sure you can make the payments so you don’t put your home in jeopardy.

Tip
Make sure the loan doesn’t come with a prepayment penalty.

Step 7: Stop spending!
Put the brakes on unnecessary spending so you don’t incur more debt while paying off what you already owe.

Did You Know?
The U.S. national debt reached $10 trillion on September 30, 2008.