Debt Consolidation – a Comprehensive Guide

When you have a high debt load, you may feel it is hard to stay on top of the payments, especially when the debt is spread out across various loans and credit cards. If you are looking for options to ease out your debts spread across your credit cards and loans, you can opt for debt consolidation.

Debt consolidation can either open up a world of opportunity allowing you to tackle all your debts or can put you into a lot of trouble. There are many reasons for you to be cautious about debt consolidation, but as long as you do it right and are responsible, this can be the best available option for you to reduce the debt.

What is Debt Consolidation?

Briefly, debt consolidation is taking debts from various sources, such as different credit cards and loans, and combining all of them into one. This can help manage your debt more efficiently so that you can pay what you owe with ease.

By consolidating your debts, you will have only one payment to make each month. You will have to pay only one rate of interest, and that can be fixed or variable. This will depend on how all your debts are combined. The process of debt consolidation is relatively straightforward.

The best thing about debt consolidation is it combines multiple smaller payments, each having a separate due date, interest rate, and terms, into one single payment each month, with only one due date, one rate of interest, and one term. Debt consolidation will allow you to transfer all your debts to a single lender, and based on your credit score, when you combine all your debts, you may be eligible for a lower payment and lower interest rate.

Consolidating your debt provides several benefits like single due date, comparatively lesser monthly payment, a single rate of interest, lesser stress, and a lesser number of bills each month to worry about.

Benefits of Debt Consolidation

Debt consolidation offers several benefits. Have a look at these benefits:

  • If you have a good credit score, you may get consolidated debt at a lower interest rate.
  • You can save money if you get a lower interest rate. With a lower interest rate, you will have to pay less interest, and hence you will save more.
  • With a single payment, you will have only one payment to make and only one due date to follow. You will not have to keep track of various payments of loans and credit cards.
  • With consolidation, you can get a comparatively lesser amount of combined payment.
  • If you are merging multiple payments using your credit cards or taking a loan, you may initially see a slight dip in your credit score, but with time, your score can slowly increase as consolidation will allow you to pay for all your debts faster. Moreover, with just one payment, your credit score may get a boost with regular payments on time every month.

Types of Debts that You can Consolidate

When you have more than one type of debt and are looking to consolidate, you might be confused about what types of debts you can add to consolidation. A consolidation can merge many different types of debt. To plan your consolidation, you need to understand the types of debts that you can merge into a single platform. The debts that can be merged are:

  • Credit Card Loans

Credit cards allow you to spend money conveniently. Many credit cards offer cash backs in the form of miles and reward points for your purchases. However, most credit cards offer you high-interest rates. If you pay a minimum due amount every month, you will have to pay a very high-interest rate, thus making it difficult to pay your debts.

Credit cards allow you to spend money conveniently. Many credit cards offer cash backs in the form of miles and reward points for your purchases. However, most credit cards offer you high-interest rates. If you pay a minimum due amount every month, you will have to pay a very high-interest rate, thus making it difficult to pay your debts.

  • Medical Debt

Medical expenses can hurt your wallet badly if you don’t have medical insurance or if it asks you to pay from your pocket. When you have unpaid medical bills, it can be huge pressure on your pocket and can disturb your finances.

However, you can merge your medical bills into a single payment to ease out the stress. If you have a huge medical debt that your insurance coverage or emergency fund can’t cover, it is advisable to add them to your debt consolidation plan.

  • Student Loans

handle your debt. When you have multiple loan payments that you pay every month with different due dates, you can amalgamate them into one single payment. With a single lender, you only have a single debt rule and due date. While consolidating your debt, consider choosing a lender that offers reduced interest rates.

  • Other Debts Eligible for Consolidation

Apart from the above-mentioned ones, you can also amalgamate other types of debt, including:

  1. Payday loans
  2. Retail store cards
  3. All types of personal loans

Should I Opt for Debt Consolidation?

If you have multiple debt payments with different due dates, or if you are unable to keep track of them, or if you have credit card payments rising every month and you are unable to cope up with the rising debt, then you seriously need to consider debt consolidation.

If you really want to turn around your financial life, you should consider debt consolidation. Most credit card users have huge credit card dependencies, leading to piling up of debt each month, especially when they are unable to keep track of the payments. You can tackle this easily with a good plan.

Debt consolidation can be at your rescue as it simplifies your payments, provides you an opportunity to set your debt to an achievable goal every month, and lets you manage your finances efficiently.

Just do some research and compare the best plans available for consolidation to achieve “Single, affordable payment every month to only one lender.” If you are successful in getting this, your consolidation plan will help you ease out the stress.

What are the Ways to consolidate your Debt?

When you are ready to consolidate, you would be looking for ways to consolidate your debt. The best thing about debt consolidation is you have multiple ways to do it. With so many options available to choose from, you should consider the one that is right for you and fits your budget.

You can compare various methods of consolidation to know how they will work, how they will benefit you, and how they will affect your credit score. Here are different options that you can consider for consolidating your debt:

1. Balance Transfer

The first option you can look for is transferring debts to a single credit card. This can be the best option for you if you are able to get a card that offers low-interest-rate or at least that provides a low introductory interest rate. Balance transfer to a credit card is beneficial when there is a low transfer fee, between 2-4% of the balance.

If the card provides an introductory offer of low-interest rate, check for the duration for which it offers. In most cases, it is for 12 to 18 months. Also, you should avoid making new purchases using this card after transferring the balance. The new payments will have regular interest rates.

Balance transfer on a credit card will work best if you have a comparatively lower amount of debt that you can pay within the limits of low-interest rate duration.

2. Home Equity Line of Credit (HELOC) or Home Equity Loan

Homeowners can use home equity to secure a loan or line of credit to use for consolidating the debt. These types of loans offer low-interest rates than credit cards and other loan options available. Moreover, with a home equity loan or HELOC, you will be exchanging your bad debt with good debt.

However, you need to be extra careful while choosing this option as you will be putting your home on the line. If you are unable to pay your loans, you can even lose your most valuable asset.

Home equity loans and home equity lines of credit are different. An equity loan completely dissolves when you finish paying the interest and principal, while a line of credit can be used multiple times. As you pay the balance of your home equity line of credit, money is freed up to be borrowed again.

3. Personal Loan or Debt Consolidation Loan

Many types of loans, such as personal loans, are available for you to apply in replacing your debts into a single payment.

The most important benefit of a personal loan is that you don’t require collateral; this means you do not require putting your valuable assets on the line to secure the loan. Usually, you need to have a good credit score to get these loans, especially when you want to get a loan at a reasonable interest rate.

Another good option is to get a debt consolidation loan that you can avail from a bank or debt consolidation company.

4. Borrow from Retirement Plan or Life Insurance

If you don’t want to get an additional loan or are unable to find a new credit card with a lesser interest rate, you can also consider the option of borrowing from your life insurance policy or retirement savings.

By borrowing from retirement savings, you can take your own money to get out of the debts. Then, you can repay the amount to the plan or the policy with interest-paying to you.

These types of loans are easy to qualify for, but you may have to face penalties or taxes if you don’t pay back the amount withdrawn. Due to this, it is advised to keep this as the last option. Go for this only if you aren’t able to get the money from other methods like credit card, personal loan, or home equity loan.

You may have another option to get the required amount for debt consolidation. It is borrowing against your life insurance policy. Most insurance companies let you borrow cash up to the amount equal to the policy.

Steps to Consolidate Your Debt

After you have explored the options you can avail, you would be looking at how you can go further and get your debt consolidated.

Here are steps to follow for Debt Consolidation:

1. Check your Credit Score

Evaluate your credit score and check what options you can avail of for debt consolidation. If you have a bad credit score of around 300 to 629 on the FICO scale, you might not be eligible for all types of loans. 

If you have a credit score of 690-850, you are likely to get quick approval and at lower interest rates. Ideally, your loan for debt consolidation should have a lower rate of interest. A lower interest rate will reduce the overall cost of consolidation and shorten the amount of repayment.

If your credit score is not good, you can take some time to improve your score and then opt for consolidation. Follow the below steps to improve your credit score:

  • Regulate your late payments: From 30 days past the due date, your late payment is reported to the credit bureaus, and it can penalize you with around 100 points of credit score. If you have a pending payment within 30 days of the due date, you can still save your credit score by paying off the payment.
  • Check for Errors: Evaluate your credit score once in a year and check if there is an error in the report like payment done to wrong debts or accounts marked closed incorrectly. Report these errors to the credit bureaus to improve your score.
  • Repay your debts: 30% of your credit score accounts for the debts you owe. Check if you can pay any debt with high-interest rates. This will improve the debt to income ratio and allow you to get a loan on a lower interest rate.

2. List Out Your Debts

Prepare a list of all your debts that you are considering to merge into a single payment. This can include your personal loans, credit card payments, store card payments, study loans, medical expense bills, and payday loans. List down all the payments that you pay each month with high-interest rates.

List down the money you have to pay every month towards each debt. This will help you evaluate how much you need to borrow through a loan, credit card, HELOC, or from your retirement plan. Remember, the loan you borrow should have a lower monthly payment and lower interest rate than all the debts in total.

3. Compare Various Options Available

With everything in place, now it’s time to go shopping for the loan. Check for the options available to you like credit card, online lender, personal loan, debt consolidation loan, home equity loan, or HELOC.

With everything in place, now it’s time to go shopping for the loan. Check for the options available to you like credit card, online lender, personal loan, debt consolidation loan, home equity loan, or HELOC.

4. Apply for the Loan or Credit Card

Based on the selection you made in the previous step, you need to apply for the loan or new credit card. You will be asked to submit several documents to complete the process, including proof of address, identity, and income.

Read and understand the terms of the loan to understand all the fine prints before you sign. Check for any extra fees, penalties for prepayment, and reporting of late payments to the credit bureaus. 

5. Make the Payments

Once your loan is approved, and the required process is completed, you will get the payment into your account. If you decide to pay using the balance transfer option, you will be receiving the new credit card. Start paying off all your debts with different lenders. Check all the accounts for zero balance. You can also call the creditors to ensure that all the money is paid off.

Do this at the earliest to avoid additional interest on the old debts. This is also important to eliminate the temptation of spending loan money on other things.

Who should avoid Debt Consolidation?

Debt consolidation may be the best way to consolidate your debts, but this is not always the case. Here are some scenarios where one should consider avoiding debt consolidation and explore other repayment options:

  • If you don’t have enough income to make a minimum monthly payment required for debt management
  • If you don’t have a good credit score to qualify for a personal loan or credit card balance transfer at low-interest rates
  • If you don’t want to add the upfront cost and transfer fee to the existing debts
  • If you can’t consolidate all the debts in one place
  • If you think that applying for a new credit card or loan will further affect your credit score
  • If you have too high debt that can’t be paid through debt consolidation
  • If you have an income to pay for all the debt, but need a plan to do so

It is important to do your own research and understand all about debt consolidation. Debt consolidation might not be an option if you are just looking for a plan to pay off your debt. While consolidating the debt, remember not to add new debts into your account, as this will be quite hard to manage.

Paying off your debts needs some time, and it is important that you stay focused and committed to achieving the goal. Strong determination can benefit you while trying to achieve financial independence.

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