Is Debt Consolidation Right For You?

Twenty years is a long time to pay for a four-year degree. But that's how long it could take to pay off the typical student loan debt, even if you make regular monthly payments. The average student loan debt is $16,928, according to the U.S. Department of Education.

To make matters worse, the average student leaves college with $4,776 in credit card debt, according to Nellie Mae, a national provider of higher education loans. The good news is that borrowers can save money on their debt repayment by restructuring their debts into one monthly bill.

Debt consolidation refers to a restructuring of your current debt, whereby multiple debts are combined into one. Some banks do offer debt consolidation loans for qualified borrowers. However, there are two common types of debt consolidation that are not considered loans but can allow you to restructure your debts and help you get out of debt faster.

Credit Card Balance Transfers

Banks have many promotional offers that encourage you to transfer existing balances with other high interest rate credit cards. In most cases the interest rate is lower than what you are currently paying. Be sure to use caution when going this route as many of these balance transfer offers may include transaction fees. In some cases, the balance transfer may also be considered a cash advance resulting in a less favorable interest rate calculation.

Finally, be sure to read the fine print as many of these attractive balance transfer offers have what is referred to as an introductory period. The reduced interest is only in affect for a brief period of time, usually between 3-12 months, after which the interest rate increases to a higher amount.

Benefits of balance transfers:

• Reduce your monthly payments
• Have your interest rates lowered
• Increase cash flow
• Make one convenient monthly payment
• Reduce stress
• Pay down existing debt faster

"Balance transfers are smart money management if you close the old credit card accounts afterward," says E. Thomas Garman, a personal finance expert. "Otherwise, that hurts your credit rating because you''ll have too many accounts open, which looks bad on your credit report. The danger is that you may think you freed up some more spending money and then you go and spend it."

Debt Counseling

Consumer credit counseling agencies offer debt management programs that allow you to consolidate your bills. They negotiate with your creditors to obtain lower payments, reduced interest rates and/or waive late and over the limit fees. Once an affordable payment plan has been established, you make one monthly payment to the credit-counseling agency. The agency then disburses payments directly to your creditors.

In general, debt counseling is intended for people who are having serious financial difficulties. The impact of a debt management program on your credit report varies depending on the circumstances. By making payments promptly most people may actually improve their credit rating.

Benefits of debt counseling:

• Reduce your monthly payments
• Have your interest rates lowered
• Help you avoid bankruptcy
• Make one convenient monthly payment
• No penalty for early repayment
• Pay down existing debt faster

"Debt management programs were created to provide a more viable alternative for consumers who are considering bankruptcy," said Felix Martes, strategic alliances manager for InCharge Debt Solutions, a national credit counseling agency. "Debt consolidation agencies do not and cannot report credit history. However, your creditors may report to the credit bureaus that you have joined a debt management program. Late and/or missed payments may negatively impact that reporting and affect your credit rating. Whether you continue to pay your debts on your own or via a debt management agency, it is imperative that you make your payments consistently and on time every month."