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A suspicious reader wants to know if he really needs professional help. He might not.

Question: I trying to get out of debt and I keep hearing ads for debt consolidation. Isn’t that something that I can do on my own? Why do I need a company to help me? And what’s the catch? I’ve learned in my 50 years that everything has a downside.

— Peter in Florida

Howard Dvorkin CPA answers…

You’re right. There are several different debt ways to consolidate debt and you might not need a debt consolidation company to help you. There are a few ways you can attempt to consolidate on your own. But consolidation isn’t without its risks. In fact, if it’s used in the wrong situation, it can end up making your debt problems worse. So, you need to be aware of these risks so you can choose the best solution for you.

First, let’s review those debt-consolidation tools you can wield without assistance. I’ll even list the “catches” for you, so you understand the pros and cons of debt consolidation using these various solutions…

1. Make a balance transfer

Bank cards are in the colors of living coral and blue with shiny yellow coins symbolizing the electronic exchange of moneyThis is the easiest move. All you do is transfer your debts from a high-interest credit card to a lower-interest one. Debt.com even tells you how to take advantage of what’s known as zero-percent APR promotions to save big. That’s a huge benefit because it gives you time to pay off your debts without interest charges eating away at your payments. You can focus solely on repaying the principal debt you owe.

The catch: By law, cards that offer interest-free financing can’t raise their rates for at least six months. That gives you six months to pay off your debt interest-free. But if you don’t significantly pay down your debts during that time, you’re right back where you started. Higher interest rates will kick in and start eating into your payments. There’s also a fee to make each transfer. And, of course, only people with good credit can qualify for those zero-percent APR offers.

2. Take out an unsecured loan

“Unsecured” loans are just what they sound like — you aren’t putting up any collateral, like a car or house. While interest rates will be significant, they’ll still be less than those on your credit cards. So, you take out a debt consolidation loan to pay off your credit card bills, then pay back the loan for less interest. Loans also have fixed payments, making them easier to budget for than credit cards.

The catch: As you can imagine, you need really good credit before a bank will extend you one of these loans — and not everyone does. Even if you qualify, you need the discipline not to spend this new lump of money on anything else but your credit card debt. You also need the willpower to not run up new balances on your cards once you pay off the existing balances with the loan.

3. Take out a home equity loan

A home equity loan typically offers much lower interest rates than an unsecured loan because your home is your collateral.

The catch: First, you have to be a homeowner to use this option. More importantly, this is a dangerous form of debt consolidation because you’re literally betting the farm that you’ll pay it back. If you don’t, you could end up homeless.

The pros and cons of working with a debt consolidation company

Of course, Peter, there are also “catches” to employing a debt consolidation firm.

When you enter into a debt management program, also known as a DMP, you must stop using credit cards. All accounts that you include in the program will be frozen for the duration of your enrollment in the program. You can’t use those cards. You also won’t be able to apply for new credit cards.

Now, I don’t see this as a bad thing — I’ve written as much in my book Power Up — but some clients I’ve advised over the years are literally addicted to credit cards. They might have close to $100,000 in credit card debt, and they fully realize they desperately need help, but they just can’t let go of those cards.

I tell them they can get a debit card so they can still fly aboard an airline and rent a car, but let’s face it: Their lack of willpower with credit cards got them in this mess. The solution to any addiction is not more of what got you there.

A debt management program can help you break a credit addictionIn more than 20 years as a financial adviser, educator, and author, I’ve seen literally thousands of former credit cards addicts emerge from their DMPs with not only zero debt, but zero addiction. Some get new credit cards and use them responsibly. Some find no need for them any longer.

The big difference? The debt consolidation company provided free educational tools to assist them, and that made all the difference. Sometimes, Peter, going it alone is lonely.

Learn more about the three reasons you need expert debt consolidation assistance here »

Comparing the pros and cons of debt consolidation to debt settlement

Finally, Peter, if you’re paying attention to ads touting to help you get out of debt, you may also be considering debt settlement. Debt settlement advertisements claim to get you out of debt “for pennies on the dollar.” This is, by and large, accurate – the average settlement pays back less than half of what the person originally owed.

But, you guessed it, there’s a catch. Every debt you settle incurs a seven-year penalty on your credit report. These can seriously drag down your credit score and make it tough to move forward once you eliminate your debt. So, even though you can get out of debt faster and cheaper, it will take you longer to recover financially.

Don’t take chances when it comes to getting out of debt. Talk to a debt resolution specialist now for a free evaluation to find the best solution for your needs.

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About the Author

Howard Dvorkin, CPA

Howard Dvorkin, CPA

I’m a certified public accountant who has authored two books on getting out of debt, Credit Hell and Power Up, and I am one of the personal finance experts for Debt.com. I have focused my professional endeavors in the consumer finance, technology, media and real estate industries creating not only Debt.com, but also Financial Apps and Start Fresh Today, among others. My personal finance advice has been included in countless articles, and has appeared in the New York Times, the Washington Post, Forbes and Entrepreneur as well as virtually every national and local newspaper in the country. Everyone should have a reason for living that’s bigger than themselves, and besides my family, mine is this: Teaching Americans how to live happily within their means. To me, money is not the root of all evil. Poor money management is. Money cannot buy happiness, but going into debt always buys misery. That’s why I launched Debt.com. I’m glad you’re here.

Published by Debt.com, LLC