The 7 Debt Consolidation Options I Considered

Sharing is caring!

Having dealt with heavy credit card debts after my divorce, I know how banks can turn your financial difficulties into a desperate situation by increasing your interest rate and, with it, your minimum payments.

While researching my options, I took an in-depth look at all my debt consolidation options. Some I can recommend, but others I had good reasons for rejecting.

Bank/Credit Union Personal Loan or Emergency Loan

The bank you have a checking account with may offer you a better debt consolidation option than credit card companies. When you apply for a personal loan that will be used to consolidate your credit card debts, this fact will be taken into consideration by the loan officer.


Three years ago when I consolidated credit card debts with a personal loan, the loan officer was able to offer me a lower APR with the proviso that the lending bank would distribute the funds to my creditors, thereby guaranteeing that my debt-to-income ratio will remain the same.

Consolidating my debts under a single emergency personal loan taken for a three-year term raised my credit score and allowed me to get rid of the debt in a reasonable amount of time.

Peer to Peer Lending

Instead of working with a traditional bank, you can turn to a new form of online lending known as Peer to Peer lending. Websites like Lending Club or Prosper connect investors who wish to lend money at interest with borrows who are looking for better APRs and fewer fees.

Browsing their websites, I was immediately able to compare rates, loan options, and fees, which were better than those I’ve seen offered by commercial banks on balance transfers. I am now considering taking a personal loan to consolidate medical bills.

As I shop around, my credit report will be hit a few times, but my credit score is likely to go down by a few points only as the applications will be similar in nature.

Single Credit Card Consolidation

If you have a single credit card with enough credit limit to accommodate the balances from all your other cards, consider using it to consolidate your debts. If you have an impeccable payment history, first give the bank a call and ask to speak with a loan officer.

When I did that a few years ago, I explained that I would like to consolidate my debts with this particular bank because I appreciate their customer service. I asked if a special APR could be arranged without balance transfer fees.

On that occasion, the answer was “yes” and I consolidated my debts and reduced my monthly expenses. Once more, the solution raised my credit score.

Home Equity Loan

If you own a home that has equity, you can take a second mortgage which will pull out this equity for the purpose of consolidating your debts. When I had incurred credit card debts in renovating my home, I took out a second mortgage.

The new appraisal of my property reflected the improvements I had made, which allowed me to pull out enough equity to cover all my debts. This effectively consolidated my credit card bills into a smaller payment. It also improved my credit by switching my unsecured debt into secured debt.

Second Mortgage Refinance

If you already have a home equity loan (second mortgage), you may want to refinance it and consolidate your debts. In one of my older homes, I had decided to refinance my second mortgage due to a large increase in property values.

A new appraisal of the property showed that I could take out enough money to cover my credit card debts and motorcycle payment. At the same time, with the fall of interest rates, I was able to get a better second mortgage without any fees, while my credit score rose because I had gotten rid of unsecured debt.

Debt Settlement Company

Also known as debt negotiation or debt resolution, this debt consolidation approach will hurt your credit badly, and, I for one, decided against using it. Under the guidance of a debt settlement company, you will be asked to stop making payments to your credit cards.

This tactic must be pursued for several months, until the debt becomes so “uncollectable” in the eyes of the lender (who will probably be someone other than your original bank by this time), that a negotiated sum of between 40% to 60% less than the original debt is arrived at.

At that point, you’re required to make full payment of that sum. For this reason, debt settlement companies have you start making a large monthly payment to them (to be put in Trust) instead of the money you would have paid the credit card companies.

This has opened the door to cases of fraud, with consumers losing thousands of dollars in payments that were never delivered to their creditors. Even with a reputable debt settlement company, be prepared to pay taxes on any forgiven debt at the end of the tax year (unless you are insolvent by IRS terms), and look carefully at the fees the debt settlement company will charge you, yet another area open to consumer fraud.

Credit Counseling

Also referred to by the acronyms CCCS and DMPs, credit counseling or debt management plans are offered by credit counseling organizations put in place to try and prevent bankruptcies. Because I am financially savvy, I was able to get myself out of debt on my own.

However, reputable credit counseling organizations can prove helpful, especially as they may negotiate with your bank to reduce your interest rate and monthly payments. In cases of insolvency (or close to it) debt may be forgiven as well.