In the first post of this series, we explored the different ways to pay off credit card debt. As I stated in that post, debt consolidation is my recommended approach. In part 2 of this series, we’ll now take a broad-brush look at some ways you can combine your debts under one lower rate.

The list of options below is presented in no particular order of preference. As we’ll see throughout this series, the option that’s best for you depends on a few factors including the total amount of debt owed and the amount available each month to pay it down.

• Balance transfer to a lower rate credit card. A credit card that has a lower fixed rate or a special introductory rate period (even some at 0% APR) can offer quick relief from an exhorbitant interest rate of a predatory lender.
• Traditional debt consolidation loan. Pretty straight forward option here. You take out one loan with another creditor for the sole purpose of paying off your credit cards and other debts. You then make payments to this one creditor. Several things to look for here though, because some debt-consolidation loans just give you a lower monthly payment, but may not necessarily help in accelerating the pay off of the amount of principal you owe.
• Mortgage refinance. This is where you consolidate your debt into your mortgage leveraging the built-up equity in your home. This option carries more risk for sure, especially in today’s housing market. However there are also some tax advantages to this option that we’ll explore more on later.
• Home equity line of credit. Like a mortgage refinance, this option also transfers the debt to your home. In a nutshell, instead of refinancing your home loan, you’re just taking out a 2nd mortgage on it instead.
• Borrowing from your 401K. Many 401K plans these days allow you to borrow directly from your retirement plan and pay yourself back with interest. There are some limitations, risks and opportunity costs involved with a 401K loan, so stay tuned for this one. When we talk about this one, there’ll be a lively discussion for sure.
• Peer-to-peer loan. This is a relatively new phenomenon where groups of people loan money directly to others — no bank involved whatsoever. The leader in this kind of lending is Prosper.com. I have been doing peer-to-peer lending with Prosper.com for a few months now, and I’ve been pretty impressed with how the site works. As a lender on Prosper, it feels good being able to directly help people dig out from under a bad debt situation.

Regardless of the approach you take, once your debt is consolidated, you’ll need to guard against getting back into debt. Some people recommend that you cut up your other credit cards and cancel them to prevent going back into more debt. Cutting up your cards (or at least taking them out of your wallet) provides a nice psychological boost, however be careful about actually closing the account. Closing older accounts with well-established payment histories and high credit limits may hurt your credit score.

Paying off debt is a lot like sticking to a diet or quitting smoking. If a person does not have sufficient determination to change his/her situation, no approach to debt management is ultimately going to succeed. The person who throws away their pack of cigarettes and vows never to have another one can just go out and buy another pack. Likewise, the person who cancels their credit cards can just as easily respond to the next “pre-approved” offer letter that comes in the mail. The credit card itself is never the problem, it’s the discipline behind its use that is.

In the next posts in this series, we’ll be focusing a post on each of the above options in-depth; including the inherent advantages, drawbacks and risks of each. First on deck will be credit card balance transfers. Transferring balances is a well-known shell game. When we talk about this one in particular, we’ll discuss how to best play the shell game and whether or not you should even play it to begin with given your particular debt situation.

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