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Debt Consolidation: What is it, and Should I Do It?

Debt Consolidation

Debt consolidation combines several debts into a single payment. If you qualify for a low enough interest rate, it may be a smart choice.

Debt consolidation is the process of combining various debts, often high-interest obligations such as credit card bills, into a single payment. If you can secure a reduced interest rate, debt consolidation may be a viable option for you. This will assist you in reducing your overall debt and reorganizing it so that you can pay it off quicker.

Debt consolidation is a viable option if you have a manageable amount of debt and simply want to reorganize multiple bills with different interest rates, payments, and due dates.

How to consolidate your debt

There are two basic methods for debt consolidation, both of which combine your debt payments into a single monthly amount.

  • Get a credit card with 0% interest on debt transfers: Transfer all of your debts to this card and pay off the entire balance during the promotional period. To qualify, you will most likely need strong or exceptional credit (690 or better).
  • Get a fixed-rate debt consolidation loan: Use the loan money to pay down your debt, then repay the loan in payments over a defined period of time. You can get a loan even if you have terrible or fair credit (689 or below), but applicants with better credit scores are more likely to get the best prices.

A home equity loan or a 401(k) loan are two more options for debt consolidation. However, all of these solutions include risk – either to your property or to your retirement. In any event, the best alternative for you is determined by your credit score, profile, and debt-to-income ratio.

When Debt Consolidation Is a Good Idea

Consolidation strategy success requires the following:

Here is an example of when consolidation makes sense: Assume you have four credit cards with interest rates ranging from 18.99% to 24.99%. Your credit is excellent because you consistently make your payments on time. You may be eligible for an unsecured debt consolidation loan with a 7 percent interest rate – a much-reduced interest rate.

Consolidation provides a light at the end of the tunnel for many individuals. If you take out a loan for three years, you know it will be paid off in three years if you make your payments on time and limit your expenditures. Making minimal credit card payments, on the other hand, might mean months or years before they’re paid off, all while incurring more interest than the original balance.

Common questions:

Is it a good idea to consolidate credit cards?

Consolidate your debt if you can receive a loan with better terms and/or it will help you make on-time payments. Just make sure that this consolidation is part of a bigger debt-reduction strategy and that you don’t incur additional debt on the cards you’ve combined. Learn how to deal with credit card debt.

How does a debt consolidation loan work?

You can pay off your creditors yourself with a personal loan, or you can use a lender who sends money directly to your creditors. Learn about the stages involved in obtaining a personal loan.

Do debt consolidation loans hurt your credit?

Debt consolidation may improve your credit if you make on-time payments or if you consolidate your credit card balances. If you build up credit card bills again, shut most or all of your remaining cards, or skip a payment on your debt consolidation loan, your credit may suffer. Learn more about the impact of debt consolidation on your credit score.

When debt consolidation isn’t a good idea

Consolidation is not a panacea for financial difficulties. It makes no mention of the excessive spending habits that lead to debt in the first place. It’s also not a viable option if you’re drowning in debt and have no possibility of repaying it even with lower payments.

If your debt burden is little — you can pay it off in six months to a year at your present rate — and combining would save you just a tiny amount of money, don’t bother.

Instead, try a do-it-yourself debt-reduction strategy, such as the debt snowball or debt avalanche.

If the number of your bills exceeds half of your income and the calculator above indicates that debt consolidation is not your best choice, you are better off seeking debt relief rather than treading water.

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Mambwe Abebe