Debt Consolidation – How to Consolidate Credit Card Debts
If you need help getting out of debt, you are not alone. Albeit signs display an upturn in the economy, many Americans are deep in debt, and not everyone can work overtime or a 2nd job to pay down that debt. That’s where debt consolidation and other financial options come in.
What is Debt Consolidation?
Debt consolidation is combining several unsecured debts — credit cards, medical bills, private loans, payday loans, etc. — into one bill. Instead of having to write checks to 5–10 creditors every month, you consolidate bills into one payment, and write one check. This helps eliminate mistakes that result in penalties like incorrect amount or late payments.
There are three major types of debt consolidation: Debt Management Plans, Debt Consolidation Loans and Debt Settlement. These are not quick fixes, but rather long-term financial strategies to help you get out of debt. When done correctly, debt consolidation can:
- Lower your interest rates
- Lower your monthly payments
- Protect your credit score
- Help you get out of debt swifter
In This Section
How to Consolidate Your Debt?
Making the decision to take act is the very first step. Disregarding your debts will not make them go away; it will make your problems worse. The sooner you get help with your credit card debt and make a plan to repay, negotiate, or consolidate them, the sooner you’ll be living a life free of debt.
Know Your Options
A debt management plan or debt settlement should be your top options for consolidating your credit card debt, but alternatives include obtaining a debt consolidation loan, borrowing from your retirement funds or the equity in your home, and consolidating your student loans. While you can’t consolidate federal student loans with other debts, including private school loans, lending institutions can consolidate private education loans with other sources of debt.
Know the Risks
Financial advisors tend to lean away from turning unsecured debt into secured debt, so utilizing home equity is often not considered the best option. You risk losing some or all of the assets you used to secure the debt. Similarly, you should explore all other options before choosing to withdraw money from tax-free accounts you set up for your retirement.
How Debt Consolidation Works
What Is The Best Way to Consolidate Debt?
There are several ways to consolidate debt, depending on how much you owe. The best way to consolidate credit card debt under $Trio,000 could be to get a zero-percent interest credit card and transfer balances from high-interest credit cards over to it. You also could look at a individual loan to pay off your balances. You could get a home equity line of credit, a home equity loan or a 2nd mortgage on your home, or refinance your existing mortgage.
Other options include borrowing against a entire life insurance policy and borrowing against you retirement savings. The best way to consolidate a large amount of credit card debt (anything over $Trio,000) without taking on a fresh loan, is to enroll in a Debt Management Plan.
Debt Management Plans
Most financial experts agree that a Debt Management Plan (DMP) is the preferred method of debt consolidation. The most-recommended DMPs are run by non-profit organizations. They embark with a credit counseling session to help determine how much money you can afford to pay creditors each month. The non-profit agency can help you get a lower interest rate from creditors and reduce or waive late fees to help make your monthly payment affordable. You send one payment to the agency running the DMP and they split it among all your creditors. Utilizing a debt management plan could affect your credit score. However, at the end of the 3-to-5 year process, you should be debt free, which certainly improves your score.
Debt Consolidation Loans
A Debt Consolidation Loan (DCL) permits you to make one payment to one lender in place of numerous payments to numerous creditors. A debt consolidation loan should have a immovable interest rate that is lower than what you were paying, which reduce your monthly payments and make it lighter to repay the debts. There are several types of DCLs, including home equity loans, zero-interest balance transfers on credit cards, private loans, and consolidating student loans. It is a popular way to bundle a multiplicity of bills into one payment that makes it lighter to track your finances. There are some drawbacks — you could face a longer repayment period before you finish paying off the debt — but it’s undoubtedly worth investigating.
How to Get a Consolidation Loan
Banks and credit unions are good places to ask about consolidation loans, but online lending sites may be a better place to borrow. The key is to know how to consolidate your bills. Begin by listing each of the debts you intend to consolidate — credit card, phone, medical bills, utilities, etc. — and what the monthly payment and interest rates are on those bills. It also helps to know your credit score.
Once you have this information, make sure to compare lender’s rates, fees and length of time making payments before making a decision. A consolidation loan should reduce your interest rate, lower your monthly payment, and give you a practical way to eliminate debt.
How to Consolidate Credit Card Debt on Your Own
If you have a very good credit score (700 or above), the best way to consolidate credit card debt is to apply for a 0% interest balance transfer credit card. The 0% interest is an introductory rate that usually lasts for 6–18 months. All payments made during that time will go toward reducing your balance. When the introductory rate finishes, interest rates hop to 13–27% on the remaining balance. Be aware, however, that balance transfer cards often charge a transfer fee (usually 3%), and some even have annual fees.
Another DIY way to consolidate your credit card debt would be to stop using all your cards and pay using cash instead. This can permit you to set aside a portion of your income each month to pay down balances for each card, one at a time. When you have paid off all the cards, choose one and be responsible with how you use it.
What Is Bill Consolidation?
Bill consolidation is an option to eliminate debt by combining all your bills and paying them off with one loan. With bill consolidation, you make only one monthly payment — a good idea for when you have five, or maybe even Ten separate payments for credit cards, utilities, phone service, etc. If you consolidate all bills into one, the single payment should be at a lower interest rate and diminished monthly payment. Any savings could be used to begin an emergency fund to help prevent a future financial crisis.
How Can I Consolidate My Bills?
Debt and bill consolidation takes patience, persistence and some organizational abilities. You must commence by gathering all your bills for things like medical, credit card, utilities, cell phones. Add the total amount owed on the unsecured debt. The next step is to determine how much you can afford to pay on a monthly basis, while still having enough to pay basics such as rent, food and transportation.
When you have that number, determine whether a individual loan, debt management program or debt settlement gives you the best chance to eliminate the debt. Understand that this process normally takes inbetween three to five years. There are no effortless fixes with debt consolidation.
When Not To Consider Debt Consolidation
Debt consolidation is an appealing way to simplify your bill paying process, but depending on the method you choose – balance transfer on credit cards; debt settlement; secured private loan – there are reasons it may not be the adequate choice for all consumers.
If, for example, you choose to pay off credit card debt with a zero-interest balance transfer to a fresh card, but you proceed to use the fresh card the same way you did your old cards, you create even more debt.
If you determine to use debt settlement, your credit score will take a severe hit that will last seven years, which will make it difficult to get a loan for a car or home in that time. Also, there will be a significant spike on interest rates for any credit cards you obtain. However, using a secured loan to consolidate bills might be the riskiest choice. If you put a home or car up as security, you may get a better interest rate, but any missed payments put you in danger of losing that car or home.
For debt consolidation to work, you must calculate how many payments it will take and how much interest is included in those payments for you to eliminate the debt and see if the time and money involved is less than doing it your current way. It will be difficult. If you are not indeed committed to switching the habits that got you into financial trouble, the cost and time for debt consolidation may make the situation worse.
Debt Consolidation FAQs
How does a debt management program compare with a debt consolidation loan?
The major difference is you do not take out a loan for a debt management program. Both are set up to pay off debts in a 3-to-5 year time framework. A debt management program is designed to eliminate debt by educating the consumer to switch their spending habits and working with creditors to reduce the interest rate and fees associated with the debt. In a debt consolidation loan, the consumer borrows enough money from a bank or credit union to pay off unsecured debts. The consumer must repay that loan and whatever fees are associated with it.
What is debt consolidation refinancing?
It means including other debts in a refinancing of your home. If you have $Ten,000 in credit card debt and owe $90,000 on your home, you would refinance the home for $100,000 and use $Ten,000 of that money to do a one-time payoff of your credit card debt. This is only a valuable if you have equity in your home (market value is higher than mortgage balance) and you receive a lower interest rate and monthly payment on your fresh mortgage.
What type of loans can I consolidate?
Any unsecured debt, which includes credit cards, medical bills or student loans.
Any unsecured debt, which includes credit cards, medical bills or student loans.
Depending on the amount owed, the best consolidation loans are credit card balance transfers, individual loans, home equity loans and an unsecured debt consolidation loan. A good-to-excellent credit score is needed for credit card balance transfers. Peer-to-peer online lending has become a good outlet for individual loans. A home equity loan is a secured loan, which means better interest rates, but you are in danger of losing your home if you miss payments. An unsecured debt consolidation loan means not taking a chance assets, but you will pay a higher interest rate and possibly receive a shorter repayment period.
Are debt consolidation loans bad for my credit score?
They will be good for your credit score as long as you make on-time payments on the loan. However, if you are getting a debt consolidation loan, you likely are behind on payments so your credit score already has been dinged. If you miss any more payments, your credit score will proceed to suffer. Experts suggest using a nonprofit counseling agency, which will educate you on money management and if you qualify, enroll you in a debt management program.
What are the best loans for debt consolidation?
Depending on the amount owed, the best consolidation loans are credit card balance transfers, private loans, home equity loans and an unsecured debt consolidation loan. A good-to-excellent credit score is needed for credit card balance transfers. Peer-to-peer online lending has become a good outlet for private loans. A home equity loan is a secured loan, which means better interest rates, but you are in danger of losing your home if you miss payments. An unsecured debt consolidation loan means not taking a chance assets, but you will pay a higher interest rate and possibly receive a shorter repayment period.
When is debt consolidation the right option?
When the monthly payment and interest rate on the consolidation loan are lower than the what you were paying every month and the payoff for eliminating debt comes within five years.
A debt consolidation loan only works if you are able to reduce the interest rate and monthly payment you make on your bills and switch your spending habits. The loan won’t work if you proceed spending loosely, especially with credit cards.
If you are dazed with unsecured debt (e.g. credit card bills, individual loans, accounts in collection), and can’t keep up with the high interest rates and payment penalties that normally accompany those obligations, debt consolidation is a viable debt ease option. It permits you to concentrate on making one monthly payment, ideally at a lower interest rate. However, you need to be highly-motivated to eliminate debt and disciplined enough to stay on a program that could take 3–5 years before you are debt-free.
How do I consolidate debt and pay it off?
The very first step is to list the amount owed on your monthly unsecured bills. Add the bills and determine how much you can afford to pay each month on them. Your aim should be to eliminate debt in a 3-to-5 year window. Reach out to a lender and ask what their payment terms – interest rate, monthly payment and number of years to pay it off – would be for a debt consolidation loan. Compare the two costs and make a choice you are comfy with.
Is debt consolidation bad?
It can be if you don’t switch the habits that caused your debt. If you proceed to overspend with credit cards or take out more loans you can’t afford, rolling them into a debt consolidation loan will not help.
Are debt consolidation loans taxable?
The IRS does not tax a debt consolidation loan. More importantly, it does not permit you to deduct interest on a debt consolidation loan unless you put up collateral, such as a house or car.
Who qualifies for debt consolidation loans?
Anyone with a good credit score could qualify for a debt consolidation loan. If you do not have a good credit score, the interest rate charged and fees associated with the loan, could make it cost more than paying off the debt on your own.
Does debt consolidation work on a limited income?
Debt consolidation loans are difficult for people on a limited income. You will need a good credit score and sufficient monthly income to woo a lender that you can afford payments on the loan. A better choice might be to consult a nonprofit credit counselor and see if you are better served with a debt management program.
What do debt consolidation companies do?
Debt consolidation is a term applied to several branches of debt ease. Some companies suggest credit counseling and debt management programs. Other debt consolidation companies do debt settlement. Banks and credit unions do debt consolidation loans. Each has benefits/drawbacks, depending on the specifics of your situation.
Which debt consolidation plan is right for me?
There are so many choices available that it is unlikely to single out one. The Federal Trade Commission recommends contacting a non-profit credit counseling agency to determine which debt consolidation plan best suits your needs. The credit counselors educate consumers about debt and suggest options to eliminate it. Credit counselors are available for over-the-phone or in-person interviews, and their service is usually free.
Can I consolidate my debt without a loan?
Yes. A debt management program (DMP) is designed to eliminate debt without the consumer taking on a loan. A credit counseling agency takes a look at your monthly income and works with creditors to lower interest rates and possibly eliminate some fees. The two sides agree on a payment plan that fits your budget. This is not a quick fix. DMPs normally take 3-5 years, but by the end, you eliminate debt without taking on another loan.
Do lenders perceive debt consolidation negatively?
Most lenders see debt consolidation as a way to pay off obligations. The alternative is bankruptcy, in which case the unsecured debts go unpaid and the secured debts (home or auto) have to be foreclosed or repossessed. Lenders don’t like either of those choices. You may see some negative influence early in a debt consolidation program, but if you make stable, on-time payments, your credit history, credit score and appeal to lenders will all increase over time.
Debt Consolidation vs. Debt Settlement
These two repayment methods are often confused with each other, but they are vastly different.
Debt settlement companies promise to negotiate a lump-sum payment with each one of your creditors for less than what you actually owe. While this sounds ideal, there are drawbacks. Many creditors deny to deal with debt settlement companies and debt settlements have a hefty negative influence on your credit score.
Debt consolidation means taking out a single loan to pay off several unsecured debts. You make one payment to the lender each month, instead of numerous payments to numerous lenders. Debt consolidation has a positive influence on your credit score as long as you don’t miss any payments.
Debt settlement companies, on the other forearm, ask clients to stop paying creditors and instead send a monthly check to the settlement company that is deposited in an escrow account. When the account reaches a specific dollar purpose — this sometimes takes as long as 36 months – the settlement company steps in and makes its suggest to the creditor. The creditors are not trussed to accept the suggest. Late fees and interest payments also accumulate during this time, making the amount owed much larger.
If you choose to use a debt settlement company, you should not pay any fees until the debt has been lodged. Be sure they put in writing how much you pay in fees and how long the process will take. Recall that creditors can reject to deal with settlement companies.
If you choose a debt consolidation company, be sure to get their fees and interest charges in writing.
Debt Consolidation Calculator
Will debt consolidation lower your monthly payment or save money on interest? Come in the terms on a debt consolidation loan, then inject your current terms for each individual debt. The debt consolidation calculator will calculate the monthly payment and total interest for your debts with and without a debt consolidation loan.