You can feel overwhelmed by multiple debts and have your finances look like the largest puzzle in the world.
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Consolidating debt can make it easier to manage your monthly payments and organize your debts. You can quickly get rid of debt by consolidating your loans from various lenders and credit cards into one consolidated payment.
The Right Time to Consolidate
To get the most out of a consolidation option, ensure you are at the right stage in your debt repayment journey. Your options may be limited if you are just beginning.
“Sometimes, if someone’s credit score has been affected or they have maxed out, it can make it difficult to get many options,” Katie Bossler, a financial expert and quality assurance specialist at Greenpath Financial Wellness. This national nonprofit provides financial counseling services. “Or, the terms might not be favorable.”
This is even more true as lending standards are changing in response to economic downturns. Creditors and lenders are taking steps to reduce their risk by being selective in who they offer this option to and who is eligible for the best terms.
Start paying down your debts if your credit score isn’t good today. Pay more than the minimum amount owed, and make extra payments whenever possible.
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Bossler states that as you reduce your debt, your credit will likely increase, which could make those options more attractive or available. Your consolidation options might improve if you are further along the payment process and have improved credit scores through factors such as your positive payment history or low credit utilization.
Balance Transfer Credit Cards
Balance transfer cards provide zero percent interest for a period of time, typically ranging from 12 to 18 months. You can open the card and transfer high-interest debts for a fee. Then, you can pay them off during the intro period. Each payment will directly go towards the principal, as you are not earning interest.
WiseMoneyWomen’s Jordanne Wells spent a lot of 2019 paying off $30,000 of credit card debt. She began by making changes in her behavior, including a strict budget and regular extra payments.
Personal loans
Consolidating your debts via a personal loan, similar to a balance transfer can simplify your debt repayments by combining them into one monthly payment.
The best thing? The best part? You can reduce your interest rate. According to the Federal Reserve, credit card interest rates average at around 16% while personal loan rates average below 10%. Terms vary and the best rates go to those with good credit. Personal loan rates are usually fixed so you don’t need to worry about fluctuations in your rate.
If you decide to take out a personal loan, be proactive about your debt repayments. The length of your repayment term will determine how much you owe. This could make your monthly payment more than you are used to making on your credit cards.
Home Equity
You may be eligible to borrow your equity (the value of the house less what you owe) as a consolidation tool through a home equity loan, home equity line-of-credit (HELOC).
A home equity loan allows you to take out a lump amount, pay it off high-interest debts and then repay the loan in regular monthly installments. The home equity credit line acts more like a credit line. You can borrow against it to pay off other debts and then repay the HELOC over time.
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Plan for Debt Management
You may want to consult a nonprofit credit counselor if other options don’t work or you are really overwhelmed by your debts. These plans can be used to reduce monthly payments, whether you have debts from personal loans or credit cards.
Always look for credible credit counseling agencies that are not for profit, such as the ones endorsed by National Foundation for Credit Counseling.
Credit counselors are able to negotiate terms for your debt. They can lower your interest rate and reduce your minimum monthly payment. This is often based on your income and how much you can afford each month. This could be a good option if you are facing financial hardship and want to begin paying down your debt.
Bottom line
Consolidating debt can be a powerful tool to reduce your debt. However, you need to be careful about how you do it. It is important to take the time to analyze all of your debts and determine which consolidation options are best suited to your financial goals, including your budget, timeline and other financial goals.
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Bossler states that there is no right or wrong answer when you are wading through all this information. It’s about weighing all the options available to you. Before you sign up, make sure you understand the terms and the interest rates.