What is Debt Consolidation, and Should I Consolidate?

Debt consolidation is an excellent way of putting your debts together into a single debt. This process helps you to manage your debt better while making it easier for you to pay your debt.

If you are struggling to pay several separate debts such as credit card bills, and other high-interest debts, bill consolidation will help you roll them into a monthly payment. The good thing is that when you consolidate your debt, you may end up paying lower interest rates.

When you consolidate your bills, you don’t need to worry about the high-interest rates and different due dates of your separate debts. Since your debts have been rolled into one. Remember that debt consolidation is possible only if you have good credit cards score.

Debt Consolidation
Debt Consolidation

 

How Does Debt Consolidation Work?

You can consolidate your debt in two major ways. Irrespective of the method you use, your debt will be rolled into a single debt.

  1.       Get a balance transfer credit card with 0% interest

With this method, you can transfer all your debts unto this card. The card bears no interest but that is for a period. Hence, you won’t be paying interest on your credit consolidation for that period. It is essential that you pay off your debts on a monthly payment period before the interest-free period ends.

 

  1.       Get a debt consolidation loan at a fixed rate

This method helps you to get funds to pay off your debts at once. Then you can start paying the loan installments over a period.

There are two other ways to consolidate your debt. They are unpopular before they involve the risk of losing your home or your retirement. They involve taking a 401(k) loan and home equity. The best debt consolidation method for you depends on your credit cards profile, credit score, and debt-to-income ratio.

Consolidation Loan Rates
Consolidation Loan Rates

When debt Consolidation is a Good Idea

A credit consolidation strategy will only be successful if the following conditions are satisfied.

  1.       Your total debt is not more than 40% of your gross income. The total debt excludes mortgage.
  2.       Your cash flow is regular and enough to cover your credit consolidation payments.
  3.       Your credit score is good enough to help you qualify for an interest-free credit card. Or a low-interest credit card at least.
  4.       You have a reliable plan to help you stay out of debt in the future.

Let’s take a scenario; Assuming you have four credit card debts with interest rates that range from 18.98% to 24.98% you may qualify for an unsecured credit cards consolidation loan at a low rate of 7%. The only condition is that you should have a good credit score.

If you make payments on time, it is likely that your credit score is good. You will realize that the rate for the new loan is far lower than even your lowest rate for your credit card bills.

 When Debt Consolidation is a Bad Idea

Bills consolidation does not solve all debt problems. It does not fit into every debt situation. If you are overwhelmed by debts and there is no way you can pay it back even if you get lower rates on the debt, debt consolidation is not for you.

Another instance where you should not consider bill consolidation is when your debt is really small. Don’t bother consolidating your debt if you can pay off your loan within a year at your current pace. You won’t be saving any significant amount and the time and energy you will put into the process are not worth it.

If you think you can use a DIY method such as a debt avalanche or debt snowball to clear your debt, there is no need to consider bills consolidation.

If your total debt is more than 50% of your total income, bills consolidation may not be the best option. You may need to try extreme debt management procedures such as filing for bankruptcy.

Questions

Does debt consolidation hurt your credit?

It can cause a temporary drop in your bad credit consolidation score but if you are consistent with your payments, it will affect your credit score positively in the long run. When you consolidate your debt by taking a new loan, it adds another loan to your credit history. But it also clears all the previous debts. It marks them as fully paid. If you are consistent with the monthly payment of your new loan, it will improve your credit score significantly.

How to consolidate credit card debts?

Consolidate your credit card using these steps

  1.       Get in touch with a nonprofit credit counseling organization

These organizations will review your financial situation and help you develop a plan to deal with your financial situation. They will give you advice on your credit issue and also help you to manage your finances. They will advise you on managing money and debt, and budgeting for your monthly payment. They will also work with your creditors to develop a debt management plan for you.

  1.       You can also apply for a loan with a lower interest.

You will use this loan to pay for your debts and pay back the new loan in installments.

  1.       Use a balance transfer credit card

This card allows you to move all your outstanding balance to this card. These cards usually come with an introductory 0% APR on your balance with monthly payment.

  1.       You can also take out a home equity loan or retirement account loan. This option is risky since you risk losing your retirement funds or home.

How to consolidate credit card debt on my own?

You can use the steps mentioned above to consolidate your credit cards debts on your own. Although you may need expert advice at a point, you can do most of these things yourself.

How to consolidate credit card bills without hurting your credit?

The truth is that consolidating your credit cards debts affects your credit positively. Your credit may take a slight dip at the beginning of the process but it is not significant.

 What is Debt Consolidation, and Should I Consolidate? 

Debt consolidation is an excellent way of putting your debts together into a single debt. This process helps you to manage your debt better while making it easier for you to pay your debt. 

If you are struggling to pay several separate debts such as credit cards bills, and other high-interest debts, credit consolidation will help you roll them into a monthly payment. The good thing is that when you consolidate your debt, you may end up paying lower interest rates. 

When you consolidate your debt, you don’t need to worry about the high-interest rates and different due dates of your separate debts. Since your debts have been rolled into one. Remember that bills consolidation is possible only if you have a good credit score.

Debt consolidation loans
Debt consolidation loans

How Does Debt Consolidation Work?

You can consolidate your debt in two major ways. Irrespective of the method you use, your debt will be rolled into a single debt. 

  1. Get a balance transfer credit card with 0% interest

With this method, you can transfer all your debts to this card. The card bears no interest but that is for a period. Hence, you won’t be paying interest on your debt for that period. It is essential that you pay off your debts before the interest-free period ends. 

  1. Get a debt consolidation loan at a fixed rate

This method helps you to get funds to pay off your debts at once or on a monthly payment. Then you can start paying the loan installments over a period. 

There are two other ways to consolidate your debt. They are unpopular before they involve the risk of losing your home or your retirement. They involve taking a 401(k) loan and home equity. The best credit consolidation method for you depends on your credit profile, credit score, and debt-to-income ratio. 

When debt Consolidation is a Good Idea

A debt consolidation strategy will only be successful if the following conditions are satisfied.

  1. Your total debt is not more than 40% of your gross income. The total debt excludes mortgages.
  2. Your cash flow is regular and enough to cover your debt payments.
  3. Your credit score is good enough to help you qualify for an interest-free credit card. Or a low-interest credit card at least. 
  4. You have a reliable plan to help you stay out of debt in the future. 

Let’s take a scenario; Assuming you have four credit card debts with interest rates that range from 18.98% to 24.98% you may qualify for an unsecured bills consolidation loan at a low rate of 7%. The only condition is that you should have a good credit score.

If you make payments on time, it is likely that your credit score is good. You will realize that the rate for the new loan is far lower than even your lowest rate for your credit card debts. 

When Debt Consolidation is a Bad Idea

Credit consolidation does not solve all debt problems. It does not fit into every debt situation. If you are overwhelmed by debts and there is no way you can pay it back even if you get lower rates on the debt, debt consolidation is not for you. 

Another instance where you should not consider credit consolidation is when your debt is really small. Don’t bother consolidating your debt if you can pay off your loan within a year at your current pace. You won’t be saving any significant amount and the time and energy you will put into the process are not worth it. 

If you think you can use a DIY method such as a debt avalanche or debt snowball to clear your debt, there is no need to consider credit consolidation.

If your total debt is more than 50% of your total income, credit consolidation may not be the best option. You may need to try extreme debt management procedures such as filing for bankruptcy. 

What is debt consolidation?
What is debt consolidation?

Questions

Does debt consolidation hurt your credit?

It can cause a temporary drop in your credit score but if you are consistent with your monthly payments, it will affect your credit score positively in the long run. When you consolidate your debt by taking a new loan, it adds another loan to your credit history. But it also clears all the previous debts. It marks them as fully paid. If you are consistent with the monthly payment of your new loan, it will improve your credit score significantly. 

How to consolidate credit card debts?

Consolidate your credit card using these steps

  1. Get in touch with a nonprofit credit counseling organization

These organizations will review your financial situation and help you develop a plan to deal with your financial situation. They will give you advice on your credit issue and also help you to manage your finances. They will advise you on managing money and debt, and budgeting. They will also work with your creditors to develop a debt management plan for you on a monthly payment. 

  1. You can also apply for a loan with lower interest.

You will use this loan to pay for your debts and pay back the new loan in installments. 

  1. Use a balance transfer credit card

This card allows you to move all your outstanding balance unto this card. These cards usually come with an introductory 0% APR on your balance.

  1. You can also take out a home equity loan or retirement account loan. This option is risky since you risk losing your retirement funds or home. 

How to consolidate credit card debt on my own?

You can use the steps mentioned above to consolidate your credit card debt on your own. Although you may need expert advice at a point, you can do most of these things yourself. 

How to consolidate credit card debt without hurting your credit?

The truth is that consolidating your credit card debt affects your credit positively. Your credit may take a slight dip at the beginning of the process but it is not significant.