What is debt consolidation and should I consolidate?

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Debt consolidation bundles multiple debts, usually high interest debts such as credit card bills, into one payment. Debt consolidation might be a good idea for you if you can get a lower interest rate. This will help you reduce your total debt and reorganize it so that you can pay it off faster.

If you are facing a manageable amount of debt and just want to rearrange multiple bills with different interest rates, payments, and due dates, debt consolidation is a smart approach that you can tackle on your own – even.

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How to consolidate your debt

There are two main ways to consolidate debt, both of which concentrate your debt payments into one monthly bill.

  • Obtain a 0% interest, credit card with balance transfer: Transfer all your debts to this card and pay off the balance in full during the promotional period. You will likely need good or excellent credit (690 or higher) to qualify.

  • Benefit from a package debt consolidation loan: Use the loan money to pay off your debt, then pay off the loan in installments over a fixed term. You may qualify for a loan if your credit is bad or fair (689 or less), but borrowers with higher scores will likely qualify for the lower rates.

Two other ways to consolidate your debt are to take out a home equity loan or 401 (k) loan. However, both of these options come with risks – to your home or your retirement. Either way, the best option for you depends on your credit score and profile, as well as your debt to income ratio.

Debt Consolidation Calculator

Use the calculator below to see whether or not it makes sense for you to consolidate.

When debt consolidation is a smart move

The success of a consolidation strategy requires the following:

  • Your total debt excluding mortgage does not exceed 40% of your gross income.

  • Your credit is good enough to qualify for a 0% credit card or low interest debt consolidation loan.

  • Your cash system always covers your debt payments.

  • You have a plan to avoid going into debt again.

Here’s a scenario where consolidation makes sense: Let’s say you have four credit cards with interest rates ranging from 18.99% to 24.99%. You always make your payments on time, so your credit is good. You may qualify for an unsecured debt consolidation loan at 7%, a significantly lower interest rate.

For many people, consolidation reveals a light at the end of the tunnel. If you take a three-year loan, you know it will pay off in three years, assuming you make your payments on time and manage your expenses. Conversely, making minimum payments on credit cards can mean months or years before they are paid off, while still accumulating more interest than the original principal.

When debt consolidation isn’t worth it

Consolidation is not a quick fix for debt problems. It doesn’t tackle the overspending habits that create debt in the first place. This is also not the solution if you are overwhelmed with debt and have no hope of repaying it even with reduced payments.

If your debt is low – you can pay it off in six months to a year at your current rate – and you’d only save a negligible amount by consolidating, don’t bother.

If your total debt is more than half of your income, and the calculator above reveals that debt consolidation isn’t your best option, you’re better off. ask for debt relief than walking on water.

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