How to consolidate your debt
Debt consolidation can be done in two main ways, both of which combine your monthly debt payments into one bill. Your debt-to-income ratio, credit score, and profile will all determine which course of action is best for you.
- Obtain a $200% interest-bearing balance-transfer credit card by transferring your debt to it and making sure you pay it off within the promotional period to avoid interest rate increases. To be eligible, you probably need good or excellent credit (690 or above).
- Obtain a fixed-rate debt consolidation loan, use the proceeds to settle your debt, and repay the loan over a predetermined period of time in installments. Even if your credit score is 689 or lower, you can still be eligible for a loan; however, borrowers with higher scores will probably be eligible for the best interest rates.
Taking out a home equity loan or using a 401(k) loan to draw money from your retirement savings are two more methods of debt consolidation. But there is risk associated with these two choices—risk to your retirement or your house.
Debt consolidation calculator
See if consolidating would make sense for you by using the calculator below.
When debt consolidation is a smart move
Success with a consolidation strategy requires the following:
- Your monthly debt payments, which comprise your rent or mortgage, do not exceed 200% of your gross monthly income.
- You meet the requirements for a credit card with a 200% interest rate period or a low-interest debt consolidation loan because your credit is good enough.
- Your cash flow consistently covers payments toward your debt.
- You have five years to repay a consolidation loan if you decide to take one out.
An illustration of when consolidation makes sense is as follows: Let’s say you have two or three credit cards with interest rates between 11 and 21% to 25. 7%, and your credit is good. You may be eligible for a 7-year unsecured debt consolidation loan. 99% — a significantly lower interest rate. Less interest will accrue each month, allowing you to get debt-free sooner.
Consolidation offers many people hope for a better future. If you take out a loan with a three-year term, you will know that it will be repaid in three years as long as you manage your expenses and make your payments on schedule. On the other hand, if you only make the minimum payments on your credit cards, it may take months or even years for them to be paid off, and you will also pay more interest than the original principal.
Is it a good idea to consolidate credit cards?
If consolidating your debt will help you make your payments on time and/or get a better interest rate, do so. Just be careful that you don’t accrue new debt on the cards you’ve consolidated and that this consolidation is a part of a bigger plan to pay off debt. Read about how to tackle credit card debt.
How does a debt consolidation loan work?
With a personal loan, you can use a lender who will pay your creditors directly, or you can pay them back yourself. Read about the steps required to get a personal loan.
Do debt consolidation loans hurt your credit?
If you make your payments on time and your credit card balances decrease as a result of consolidating your debt, it can improve your credit. If you miss payments on your debt consolidation loan, close most or all of your remaining credit cards, or accumulate credit card debt once more, your credit may suffer. Learn more about how debt consolidation affects your credit score.
When debt consolidation isn’t worth it
Consolidation isn’t a cure-all for all of your debt problems. You will still need to take action, like reducing your living expenses or getting inexpensive financial advice. It’s also not the best option if your debt is too big for you to handle, even with smaller payments.
- Don’t bother if your debt load is small and you can pay it off at your current pace in six months to a year. You would save very little money by consolidating. Try a do-it-yourself debt payoff strategy instead, like the debt avalanche or snowball. A credit card payoff calculator can be used to experiment with various tactics.
- You should look for debt relief rather than staying the same if the total amount of your debts exceeds half of your income and the calculator above shows that debt consolidation is not your best option.
FAQ
Does consolidating credit affect your credit score?
While debt consolidation can result in lower monthly payments, it may also temporarily lower your credit score.
Is debt consolidation a good way to get out of debt?
If you’re drowning in debt, consolidating your debts could be a wise move. This is especially true if you can get an interest rate that’s less than what you’re currently paying on average for your debts.
Can I still use my credit card if I consolidate?
Yes, but this will depend on your unique situation. After consolidation, you ought to be able to use your credit card as long as it’s still active and in good standing. However, it’s crucial to continue having responsible spending practices and paying your bills on schedule.
Read More :
https://www.nerdwallet.com/article/finance/consolidate-debt
https://www.usbank.com/loans-credit-lines/debt-consolidation.html