Debt Consolidation and Your New Credit Life

By Gabby Hyman
Mortgage Credit Problems Columnist

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A debt consolidation home equity loan or line of credit can stave off the wolves at your door. The creditors go away and you have an affordable monthly payment that extends over a comfortable period of time. Don't forget, however, that you still have debt and perhaps a bad credit rating. If you don't change your relationship to money, you just might make the same mistakes over and over.

Many borrowers take out a "life-saving" debt consolidation home loan. Once they catch sufficient breath, they take out fresh credit card accounts. They spend wildly over their means, and suddenly realize that they now have a consolidation loan financed by a higher-interest rate because of previous debt -- and they're creating even more debt at really high credit-card rates. The word for this is "quicksand".

Coupling Debt Consolidation with Behavior Modification

Financial experts recommend credit counseling as a fundamental component in any debt consolidation loan process. It may behoove you to cut up your credit cards. Can you live with that?

Even though debt consolidation can lower your total debt by as much as 50 percent, your credit (which may already be damaged) may suffer a hit when reporting agencies see that you did not retire your debts on the terms arranged by your original lenders. You have to be willing to give up wild borrowing if this is going to work.

On the high side, your paid interest on a debt consolidation home loan may be deductible. You'll need to add your existing mortgage to a consolidation loan at an amount less than 100 percent of the total assessed value of the home.

Shop around for rates. Even at 12 percent, a debt consolidation home loan is way better than the 19-21 percent or more interest you're paying on credit cards.

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