Debt Consolidation Works - Budgets Do Even Better

Q: I'm having trouble keeping on top of all my payments each month. I've heard about consolidations, but don't know what that really means.

A: Consolidating debt means putting what you owe together and having one monthly payment that pays off your debt. There are a couple of different consolidation options to consider. When people first run into difficulty, their financial institution may offer them a consolidation loan, which pays off other outstanding balances -- for example, several credit cards. You end up with one loan and one monthly payment. It's crucial to stop using the other accounts -- otherwise, you may end up further in debt.

Along with the benefit of making one payment each month, the loan is likely to be at a lower rate of interest that can save you money in the long run. But, if you're already behind on your payments, the interest rate offered may be higher, increasing costs and the time it takes to pay off the loan.

Another type is a debt-repayment program, which consolidates monthly credit payments instead of providing a loan to pay off your account balances. These programs are available through licensed credit-counselling organizations.

The benefits are that you pay off your debt without borrowing any money and have one monthly payment that fits your budget. Many creditors will support their customers in financial difficulty by reducing or waiving interest on their accounts, providing they maintain their monthly debt-repayment plan deposits. Fees can vary, so find out actual costs ahead of time. Debt-repayment programs will also be reflected on your credit report.

Regardless of which consolidation route you choose, it's easier to get out of debt if you follow a realistic budget to help you manage regular and seasonal expenses, as well as your consolidation payment -- and make saving a habit.