Many people find themselves struggling with multiple forms of debt.
It's easy enough to get credit. Paying it all back can be another story.
Debt doesn't just sit still and behave itself. It grows if you don't control it.
If you're just keeping up with minimum payments, you'll notice your debt start to swell bigger rather than shrink.
You could be looking at years of treading water and getting nowhere if you don't do something about it.
The average household in America with credit card debt owes on average, $15,654.
The average number of credit cards among American credit card owners is 3.7 cards.
Does a $15,000 debt stretched out across 3+ credit cards sound familiar to you and your life?
The bad news is all the debt you're carrying is bad for your mental and physical health.
The good news is there are options to help you reverse the growth of your debt and start shrinking it down to nothing.
Debt consolidation solutions roll all your debts together, so you don't have to juggle multiple payments.
Ideally, you'll save money on the annual interest you pay with a lower interest rate.
You can also get your debt paid off more quickly if you choose a structured repayment schedule.
If you've tried unsuccessfully to get control of your debt in the past, you should check out the debt consolidation options out there.
Look at the tips below and pick the ones that work best for your debt consolidation needs.
Debt consolidation isn't for every person or debt scenario.
Debt consolidation could be a good idea or a bad one. Some situations are perfect for solving via debt consolidation. In other situations, debt consolidation is not recommended.
How's your credit score? Debt consolidation is a good option if you still have a credit score high enough for you to get approved for credit cards and loans.
Are you in debt up to your ears or just to your waist? Ideally, consolidation is used for a debt less than 50% of a person's annual income, known as your debt-to-income ratio.
Take the time to run a little self-assessment to see if you are a good candidate for the debt consolidation solutions we're about to tell you about.
Total up your debts. Add up your various forms of unsecured debt and the interest rates being charged for each one.
Include credit cards and personal loans (don't include mortgages or auto loans since those are secured by your home/car).
If your debt-to-income ratio shows your total unsecured debt is less than 50% of your annual income you're in the zone for debt consolidation
Get your credit score. You can get a free copy of your credit report from each of the three bureaus (Equifax, TransUnion, and Experian) once a year.
You can also get your credit score for free through many online and financial institution lenders.
You better be "Good." A "Good" credit score is over 690. If your debt consolidation solutions involve a new loan or credit card, you'll want your FICO credit score to be at least 690.
Having a good score means you qualify for loans and credit cards with lower interest rates and APRs.
Move high interest to low interest. The whole point of debt consolidation is to roll high-interest balances into a lower-interest credit account.
Here's an ideal scenario. Let's say you've got $15,000 in credit card debts across three different cards. One card charges 18.99% APR. Another charges 16.24%. The third is charging 15% APR.
You've always managed to keep on top of at least the minimum payments. When you check your credit score, you're pleased to see it's a respectable 710 or "Good."
The annual salary you bring home is $55,000 a year. Therefore, your total debt is only 27.27% of your annual income.
What you have is a perfect scenario for debt consolidation.
If your debt is small enough to eliminate it within six months to a year, don't bother looking for a debt consolidation solution.
You won't save enough to make it worthwhile.
Are you in way over your head? Does your debt-to-income ratio reveal your debt total is more than 50% of your income?
You'd be better off looking at other debt relief solutions like debt settlement companies.
Companies providing those services can renegotiate with your lenders and shrink your total debt. You pay an affordable monthly installment, and then the company pays off your creditors with a lump sum.
The first option you have for consolidating all your debt together is an unsecured personal loan.
A fixed-rate personal loan can be used to pay off all your existing debt at once.
Then you set up a repayment plan with a single monthly payment over a set term.
One payment for easier debt management. It's much easier to have one loan payment than it is to stay on top of multiple monthly credit card minimums.
The interest rate should be less than the average rate you were paying on your existing debt.
A lot of banks don't give unsecured personal loans anymore. A few will still give you an unsecured loan, including Wells Fargo and Citibank.
Online lenders can get you the unsecured loan you need. You can also look for online lenders to get a debt consolidation loan. Examples of online, peer-to-peer lending companies providing debt consolidation loans include SoFi and LendingTree.
Figure out what you owe to get started. Add up all your debts, including credit cards, medical bills, utility bills, and payday loans. Then apply for a debt consolidation loan for the total amount to pay them all off.
Shop around and compare. When you're shopping around for a good debt consolidation loan try to get one with a better interest rate than the average of your existing debts.
Calculate the monthly payments you've been making on your existing debts and negotiate a new single monthly payment that is more manageable.
Lower monthly payments, lower interest, and easy management. Unsecured personal loans can save you money and make your life easier.
Let's say you have one credit card balance for $5,000 at 18.9%, and another for $3,000 at 17.99%. Combined, the minimum payments for both loans are $320.
You also have a student loan with $5,000 left to repay over three years at 4% interest. Your monthly payment is $147.62.
Your total debt is $13,000, your average APR is 12.99%, and your total monthly payment is $467.62.
When you got to negotiate your debt consolidation personal loan, these are the numbers you are trying to beat.
You could apply for a five-year loan for $13,000 at an APR of 9%.
Monthly payment becomes more reasonable. Your monthly payment goes down to $269.86—almost $200 less than you were paying before just to stay on top of the credit card minimum payments.
You know exactly when you'll be debt-free. One of the best things about a debt consolidation personal loan is the fixed repayment term.
Rather than being unsure if you're ever going to be able to wipe out your debt, with the loan above, you know you will be debt-free five years down the road.
Another form of loan for debt consolidation is a home equity loan.
If you are a homeowner who's been faithfully making mortgage payments, you've probably built up some equity in your home.
Re-mortgage your home to pay all your debts. A home equity loan, otherwise known as a second mortgage, lets you borrow off the money you've already put into your home.
Like the unsecured personal loan, you get your home equity loan and use it to pay off all your debts.
Smaller payments at lower interest are win-win. Then you set up a repayment schedule and pay it off in monthly installments at a lower interest rate than you were paying before.
Since a home equity loan is an insured loan (your home is the collateral) the interest rates will be much less than credit cards or even unsecured personal loans. A typical home equity loan APR is 4%.
It's a good idea to pick a variable interest rate for your home equity loan as it could mean your interest rate could drop even lower than 4%.
Take out a line of credit on your home. Another type of credit where you borrow from the value of your home is a Home Equity Line of Credit (HELOC).
It's much the same as a home equity loan except it is a revolving line of credit with no fixed repayment schedule.
You can also continue to dip back into it over time if you need the funds.
It's important to be aware of the pitfalls of a HELOC. After an initial "draw" period (5-10 years), the line of credit becomes a home equity loan with a fixed repayment schedule. If the market changes over 5–10 years, your interest rate might be higher.
For both HELOCs and home equity loans, your home is the security. If you can't keep up with the payments, you could have your house foreclosed on.
Home equity loans have the lowest possible interest rates. In either case, negotiate an interest rate much lower than what you're paying on your credit cards and other debts.
With the home equity loan, you can set up a long repayment schedule.
For example, it's not uncommon for a home equity loan to have a repayment period of 30 years.
We can take the example we looked at for the unsecured personal loan to illustrate how a home equity loan can work for debt consolidation.
The hypothetical scenario involved $13,000 in combined credit card and student debt, with an average APR of 12.99%. The monthly payment just to stay on top of the credit card minimums was $467.62.
By taking out a second mortgage on your home of $13,000 you can pay the other three debts off immediately.
Tiny monthly payments over 20 years. Then you can give yourself 20 years to pay back the $13,000 at a variable interest rate around 4%.
At that rate, your monthly payments are a mere $78.78. You'd probably hardly notice the money coming out of the bank.
Even with the low-interest rate, you'll end up paying $5,906.59 in interest over the 20-year loan term.
Don't like paying interest? Shorten the payback. If you're not comfortable with paying all that interest, you can negotiate a five-year home equity loan term.
Your monthly payment will be $239.41 (which is still much lower than you were paying before just to make monthly minimums). The interest you'll pay over five years will only be $1,364.89.
If the debt you are dealing with involves multiple maxed-out, high-interest credit cards, your best bet for debt consolidation could be a balance transfer credit card.
You basically combine those other credit card debts and move them over to a new credit card.
The longer the 0% APR period the better. A good balance transfer credit card will have an introductory offer where you're charged 0% APR for 12–21 months.
You get at least a year to pay off your existing credit card balances without being charged interest.
Pay a lower APR if you don't pay it all off immediately. If you're unable to pay off your existing credit card debt within the 0% intro period, you'll get charged the regular credit card APR. Ideally, it will be lower than the APR you were paying on the other cards.
Good balance transfer credit cards have reasonable regular APRs (especially if you have a "Good" or better credit score).
Keep an eye on the APR for regular purchases when you sign up. The 0% APR period will someday end. You could see yourself paying 20% or more on new purchases, including purchases made during the intro period.
Balance transfer fees are something to watch closely. One more thing to pay attention to when choosing a balance transfer credit card is the balance transfer fee.
Most credit cards charge a fee for moving a balance from another card.
A reasonable balance transfer fee is 3%. Some cards charge 5%, which means they aren't ideal for balance transfers.
The best balance transfer credit cards have an intro period with no balance transfer fee and 0% APR. For example, the Chase Slate Visa offers 0% APR and $0 balance transfer fees for 15 months.
The numbers don't lie – balance transfers work. We can crunch some numbers to show you how a balance transfer credit card can work for debt consolidation.
Let's say you've got three maxed-out credit cards. One owes $4,000 and charges 18.99%. The second has an unpaid balance of $5,000, with an APR of 17.99%. The third card is $3,000 in debt, at 15.99%.
All the debt can be consolidated under one balance transfer credit card with an intro 0% APR period of one year.
If the balance transfer fee is 3% you'll be paying $360 to consolidate your credit card debts.
You'll be saving a year's worth of interest charged at a high rate.
Rates don't disappear. If you are still carrying a balance after the 0% introductory offer, you could be hit with a super-high APR, which you don't want.
There is a different rate for charges besides the amount you transferred. Yes, you'll pay 0% for the amount you transferred, according to the card, but you may pay a high rate (depending on the card and your credit score) for any new charges you put on the card.
So, if you put new charges on your balance transfer card, you won't be getting that 0% interest-free rate.
Home equity loans, unsecured personal loans, and balance transfer credit cards are good tools for paying off a moderate-sized debt more efficiently.
Your debt level might be so high, these options are not viable.
Last-ditch solution. Before declaring bankruptcy, it's a good idea to talk to a debt settlement company. These are often non-profit debt consolidation services.
Sometimes these agencies are referred to as a "debt consolidation company" and their services can include debt consolidation programs and debt management programs.
Like the previous solutions, these agencies also consolidate all your debt within a single umbrella.
Shrink the debt or lose it all. The difference is, the companies contact your creditors and negotiate for a smaller payment than what's owed.
For the creditors, settling for a smaller amount through debt forgiveness is better than getting nothing, which is exactly what they'd get if a bankruptcy happened.
You pay the debt settlement company an affordable monthly payment. When you've submitted enough money to pay off the lowered loan amount, the company sends it to the creditor.
The company gets its share. The debt settlement agency will also take a cut of the savings it negotiated for you.
Say you have $50,000 in combined debt with personal lenders, credit card debts, and auto loans.
Cut the total debt in half. The debt settlement agency will contact all your creditors. It might talk them down to a total debt of $25,000.
You'll pay the debt settlement company a monthly installment to pay down the debt over an agreed upon period.
Every time your installments total enough to pay off one of your debts, the company will submit the payment.
Be prepared to pay the fee. In our $50,000 example, you will have to pay more than the renegotiated total of $25,000, since the debt settlement company needs its cut of the $25,000 in debt forgiveness it just saved you.
The fee you'll get charged depends on how much money the company saved you.
Your credit score is going to take a beating. Although a debt settlement company is going to reduce your debt, your credit score is going to be battered since full payments were never received by your creditors.
Watch out for sketchy companies. The internet can connect you to legit debt settlement companies. It could also lead you to some unethical companies set up to take advantage of people with out-of-control debt.
The best place to start when you're checking to see if a debt settlement company is reputable is the Better Business Bureau website.
If you're like the average American credit card customer, you've got $15,000 in debt spread out across more than three credit card accounts.
You can keep up with the monthly minimums and hope someday you'll get the debt paid off.
Or you can pick one of the options we've offered above and consolidate your debt.
You'll immediately enjoy the ease of managing a single payment rather than trying to stay on top of multiple due dates.
Fixed payment plans, lower interest rates, and introductory periods with 0% APR are all features of debt consolidation solutions you can benefit from.
Keep in mind your credit behavior got you into your current financial situation.
It's a good idea to consider contacting a credit counseling agency and seeing a credit counselor. They can help you put together a debt management plan.
From credit cards to mortgages to auto and student loans, personal debt in the United States is slowing creeping closer to its 10-year high back in 2008. Explore...
Learn more about the different kinds of debt, as well as how to tackle them. For even further reading, we’ve included an exhaustive list of the best resources...
Use a personal loan from a bank or credit union to consolidate credit cards and other debt. Personal loans have fixed interest rates that are traditionally lower than credit card interest rates. Once you qualify for the loan you can choose a loan amount and monthly payment amount that fits your budget. Pay as agreed on a personal loan and all the debt that you consolidated will be paid in full at the end of the loan term. You’ll need excellent credit to qualify for the lowest interest rate on a personal loan. So be sure to check your credit scores before you apply.
The absolute best way to consolidate debt is to get a personal loan. You can qualify for these financial products if your credit score is current 540 or higher. You'll need to raise this score to approximate 640 if you want to qualify for a home loan or get an auto loan with a reasonable interest rate. Personal loans can help you do it even if you have a number of credit accounts and have been falling behind in your payments. Rather than working with companies to lower the amount that you actually owe by eliminating late fees, finance charges and other secondary credit costs, personal loans will allow you to pay the full amount that you owe. This way, your accounts will be recorded on your credit report as having been "Paid in Full", rather than "Charged Off".
If you choose to consolidate the debt by taking a personal loan to pay off the cards, your utilization ratio could go down, thereby raising your score. This method – in order to work – requires you to leave your credit card accounts open after you pay them off. But your credit rating could go down if an underwriter has reason to feel you could quickly rack up brand new debt on the open (and now balance-free) credit cards.
Here is my recommendation to you, visit your financial institution and find out if you can qualify for a personal loan or debt consolidation loan and move those balances over right away. You should not incur any fees for doing so, if you do find another financial institution. If you are able to move the balances without closing your existing cards that is best. Moving forward, only use the card for necessities charging only the amount that you can afford to pay off in full when the statement comes. You don't want to stop using your credit cards all together because that will limit your payment history and may prevent you from obtaining credit in the future.
Consolidation does not eliminate your debt, and neither does Settlement. In most cases, the debt service will ease your monthly burden – either by reducing the principal or the interest. That sounds good, but it will still appear on your credit report if the full amount was not paid, which will hurt your credit score. Reducing the interest is a good thing, particularly if you were holding some debt at maximum penalty rates – but this still doesn’t relieve you of the debt.
Another option is to obtain a home equity loan. Most banks and mortgage companies offer home equity loans. You'll need to fill out an application and demonstrate to the lender that you'll be able to make regular monthly payments. Your home will then be appraised to determine the amount of your equity. Typically, you can borrow an amount equal to 80 percent of the value of the equity in your home. Interest rates and terms for home equity loans vary, so you should shop around and compare lenders.
Start by reviewing the interest rates on your existing debts. Credit cards and unsecured personal loans usually have higher interest rates than other forms of secured debt like a mortgage, home equity loan or an auto loan. If you find that your rate on a home equity line of credit is less than the rates on credit cards, other personal loans or auto loans, utilizing borrowing through that line of credit may save you money.
Then evaluate your borrowing capacity available through a mortgage or a home equity loan. Borrowing through a shorter-term home equity loan will probably lower your interest rate, but most home equity loans have variable interest rates. If you have a great deal of high interest rate debt, increasing the size of your fixed rate mortgage with a refinancing (even if you end up with a slightly higher mortgage rate than what you currently have) may result in lower overall interest costs. The interest you pay on your mortgage or home equity loan is also tax deductible if you itemize your deductions.
The debt relief industry has a wide variety of con artists in it that are just waiting to take your money. If you are working with an online debt consolidation company, it is important to confirm you are working with a legitimate company. If you are being asked to pay upfront fees or required to make several months of payment in advance, avoid the company and find a lender you can trust. With a little online due diligence, you can investigate the company with the Better Business Bureau and/or your state’s Attorney General’s office.
The top mistake that consumers might make is accepting a debt consolidation loan because the payment is lower than what they’re currently paying. That may sound like a good thing but remember that the entire idea is to get out of debt as soon as possible. In some cases, the terms of your loan will only draw out your debt and perhaps even cost you more money in the long run (even if the interest rate is lower).
To avoid this issue be sure to find a lender who will let you choose the length of your loan and be sure to run the numbers. You’ll want to calculate how much you can afford to pay each month, how long it would take you to pay off your credit card with that payment, and how much you’d end up paying including the interest. Be sure to compare that to the terms of the consolidation loan you’re applying for to see if you’re really getting a good deal.
There are many ways to consolidate your debts. One way is to transfer them to a credit card with a lower interest rate. Most credit card companies allow you to transfer balances by providing them with information, such as the issuing bank, account number, and approximate balance. Or, your credit card company may send you convenience checks that you can use to pay off your old balances. Keep in mind, however, that there is usually a fee for this type of transaction, and the lower rate may last only for a certain period of time (e.g., six months).
Another option is to obtain a home equity loan. Most banks and mortgage companies offer home equity loans. You'll need to fill out an application and demonstrate to the lender that you'll be able to make regular monthly payments. Your home will then be appraised to determine the amount of your equity. Typically, you can borrow an amount equal to 80 percent of the value of the equity in your home. Interest rates and terms for home equity loans vary, so you should shop around and compare lenders.
Some lenders offer loans specifically designed for debt consolidation. Again, you'll need to fill out an application and demonstrate to the lender that you'll be able to make regular monthly payments. Keep in mind, however, that these loans usually come with higher interest rates than home equity loans and, depending on the amount you borrow, may require collateral on the loan (e.g., your car or bank account).
Don’t pay fees for consolidating your debt. You can do the same thing on your own, and paying a fee just adds to the amount you owe.
Don’t consolidate unsecured debt into secured debt. Unsecured debts include student loans, personal loans, and credit cards. Secured debt includes your home mortgage and vehicle loans. A common temptation is to tap your home equity with a line of credit, borrow against your home when refinancing, or using a title loan against your car. Although the interest rate on home loans may be lower, the length of time the mortgage is outstanding has a much larger effect than you may realize. Ultimately, you will pay many thousands more by tapping into your home equity than if you had left your unsecured debt alone. Also, unsecured creditors have no right to foreclose on your home or repossess your car. All they can obtain against you is a judgment. Combining unsecured debt with secured debt means that if you default on the loan you could lose your home to foreclosure or your car to repossession. And when you increase the amount you owe on your house or car, you are also increasing the chances of default. Unsecured debt is simply not worth putting your house or car in jeopardy. One other word of caution if you already tapped your equity to pay off unsecured debt and face foreclosure in the future is that many lenders are reporting any forgiven debt (the difference between what you owe and what the bank collects) to the IRS as taxable income to you. This means you could end up trading unsecured debt for tax debt..
Don’t consolidate low interest rate balances with higher interest rate balances. You're better off negotiating interest rates.
Don’t get sucked in by high pressure advertisements promising low monthly payments and interest rates. Zero interest rates and low rates are introductory, and when they expire, interest rates soar to 19% or even 29% over night if you are late or miss a payment or can't pay the full balance before the introductory period is over.
If you think a cash-out refinance might be a good idea, make sure you have enough equity that the cash you take out of your home won’t leave you with a loan-to-value ratio of more than 80%, post-refinance. Exceeding that ratio means that you’ll have to buy private mortgage insurance, which can easily cost 1% of the loan value every year. On a $250,000 mortgage, that would be $2,500 annually.
To calculate your current loan-to-value ratio, divide your current mortgage balance by the approximate value of your home.
(Current Mortgage Amount) / (Approximate Home Value) = Loan-to-Value Ratio
If you want to cash out some home equity to pay off high-interest credit card debt, add the amount of debt you’re paying off to the loan amount, like this:
(Current Mortgage Amount) + (Credit Card Balance to Pay Off) / (Approximate Home Value) = Loan-to-Value Ratio
You can consolidate federal education loans into a single loan with a longer term in order to lower your monthly payments. The final interest rate is the weighted average of the consolidated loans. This seems as simple as apple pie, but while a longer-term consolidation loan may result in lower monthly payments, it likely means paying more interest over the life of the loan. Currently, federal Stafford loans have an interest rate of 4.29% for undergraduate students and 5.84% for graduate students. Private loans range anywhere from below 2% for some refinance loans to greater than 10% for some private graduate student loans. This type of consolidation option is only available to federal education loans and does not save money long term, but it can be beneficial, if you have federal loans exclusively. You should consider refinancing your student debt with a third party instead of consolidating with the federal government if you have private student loans in addition to federal student loans, are interested in a lower monthly payment, and seek the potential to save money with a lower interest rate.
When you have paid down your home significantly, often more than 20%, and still have revolving debt, debt consolidation within your mortgage could be the solution for you. You can make one monthly payment instead of several and pay less overall every month. Unlike credit cards, the interest on your mortgage is often tax deductible.
For some with erratic spending habits, consolidating your debt may not be the solution, as it will not change spending habits. Once the credit accounts are closed, they must stay this way in order for it to have a positive effect on your credit. If you open additional accounts and run up the balances, your credit score will decrease.
If you carry higher interest credit card debt but have a good credit history overall, you may be able to pay off debt sooner by transferring a higher interest credit card balance to a low or no interest credit cards.
You might also be able to score a lower interest rate by calling the credit card company and requesting a lower rate, especially if you've been a customer in good standing for several years. You may qualify for a low interest loan through a peer to peer marketplace lender like Lending Club, or Prosper that gives you cash you can leverage to pay off the debt that costs you more. If you're drowning in student loan debt, you may be able to secure a better interest rate through an alternative lender like SoFi. Or you may qualify for a repayment plan that's offered through the Federal government, for some student loans.
You simply have to change your mind set from charging today’s expenses to tomorrow’s income. If you have money saved and can pay for your needs and your wants as you go, you have freedom. If you are going about your daily business thinking of all the things you want, and how easy it would be to sign off on a piece of paper to get a chunk of money from a bank before you actually earn that money, think long and hard about how much more you are going to have to work to pay that money back. Think about not only losing your future money, but also the interest you could be making on your money if you didn’t have to be paying that money back for months or years to come for an adventure or material need long gone.
Pick your bank and the products it sells wisely. You may pick a banking institution because it is the bank your parents have used for years, or the one you started with in college, or because it is geographically located by your home or office (and I like that reason because I do not want you wasting money on ATMs out of your network). While those factors may have some relevance, be smart. Do not be lured in to products. Do your research. If the deal is really ending tomorrow, wait until next week or next month. Another attractive deal is always around the corner, if you are patient. And if it looks too good to be true, it likely is.
While bad credit loans are never completely guaranteed unless specifically advertised, you can be reasonably sure that you can get a debt consolidation loan even if your credit is bad in most cases. It all depends on the lender. If you can't find a lender willing to work with you at one place, keep looking, because there will be a lender who WILL work with you in 99% of cases. If you need personal loans for debt consolidation, your options are much clearer and plentiful than if you simply needed high risk loans for frivolous or non-debt consolidation reasons, so use the resources available to you.
The reasons that debt consolidation may not be a great idea:
Debt consolidation does not change your habits it just provides you with the illusion that you are only making one payment instead six or ten.
Debt consolidation can become costly as stated above and you end up paying more money over time with high interest rates.
It will not raise your scores to the 700s.
When lenders run your credit, they consider it similar to a Chapter 13 bankruptcy.
With regards to student loan consolidation it is important for you to consolidate because student loans are considered "good debt" and typically student loans come in multiple accounts (which means multiple payments) therefore it would make sense to consolidate these.
From my perspective, if you're paying a single percent in interest more than you have to, it should be considered high.
According to Bankrate, average variable interest rates are presently hovering at roughly 16%. Folks recovering from a bad credit history can commonly see rates on cards in ranges of 23% up to 29.99% APR. If balances get out of hand with rates like that, it is easy to see how the debt service could reach "crushing" levels.
In my opinion, there seems to be a need in this industry to over-complicate matters, when all that is really needed is a healthy dose of common sense.
Whatever your interest rate is on your current loans and credit lines, if you have a cheaper alternative to hold the debt, it should be considered. If your current credit card charges you 18%, and you have access to another at 14%, what are you waiting for? Transfer that balance and start paying less. My advice is to seek out and find the lowest cost alternative you can find, and to consider ALL options.
Unsecured personal loans can be pretty flexible, as they offer rates from 9% to 20%, which can provide a powerful savings opportunity in many cases. Secured loan options can be even more powerful. A home equity line of credit is an incredibly powerful means for families who have the equity in their home to reduce higher cost debts. Ultimately, if setup fees plus interest rate equal savings, then it's worth considering consolidating what you owe into cheaper credit lines.
1. When working to adjust, consolidate or reduce consumer debts, utilize the provision of the Federal Fair Credit Reporting Act to submit to each of the consumer credit reporting agencies an up to 200-word statement as to what has caused the financial distress and the need to adjust. By submitting the written statement which is placed on a credit report, many times it will preclude the automatic rejection of credit based upon a low credit score.
2. In many areas in the country, both United Way agencies and law schools have free clinics to assist with education and dealing with creditors for the adjustment of debts. This is done on a no fee basis, and creditors are more willing to work with these agencies than the businesses that claim to adjust debts for a substantial fee.
The goal of debt consolidation is to increase your monthly cash flow. Many times, a cash-out refinancing, taking out credit cards, lines of credit and or car loans can save hundreds or thousands when it comes to debt paid out per month. For every 1,000 dollars in a mortgage, it's five bucks a month so if you have 10K on a credit card, it would only add $50 to a mortgage payment.
I think it should be done very wisely. If you can avoid using these companies, I would do so.
This can be tricky. If consumers pay off credit card debts or keep debt low while keeping them open, it could help scores tremendously. If you close the credit card, it can have a negative impact on your score. Believe it or not.
I would like to add one important point for those that are consolidating student loans:
There is much more to student loans that just an interest rate. Be sure you are not giving up flexible repayment schedules or future forgiveness options just to lower your interest rate.
On credit card debt consolidation:
If you find a card that offers a low APR for balance transfers, have a plan in place to pay down your debt before the introductory offer ends. These offers prey on those who jump on the benefit of a short-term interest rate reduction, but end up being hurt over the long term by a higher interest rate.
I've been counseling individuals, couples and small businesses for 35 years and I have to say that debt consolidation is little more than a futile scam that preys on the magical thinking of over spenders: "Yay! Here's a secret pill that will undo the accumulation of years of bad habits!" (Naturally, I come across common exceptions, those uncontrollable life events such as illness, death, divorce, unemployment.)
I can't remember the comedian who first said it but debt consolidation is where you take a bunch of hard-to-pay debts and turn them into one impossible-to-pay debt. Instead, work with a free, nonprofit credit counseling service in your state to work on the problem — your behavior — instead of just the symptom — your debt. They will help you negotiate down balances, freeze fees and interest and develop a plan to not only pay down what you owe but also avoid digging another debt hole. And it is especially those folks who have been slammed by uncontrollable life events who can benefit from these free public services.
1. Don’t let a big those seasonal commission or bonus check give you added confidence to spend. Break that big annual bonus into three parts; debt reduction, major purchase, and savings. To prevent yourself from falling into debt again, move 1/3 of your bonus to savings. Then, if you need to make a major purchase do it while you have cash in hand. Lastly, be sure to use one-third of your bonus to pay down your debts.
2. Stay away from creating new debt from multiple creditors. You may be bombarded with credit cards offers from banks and department stores throughout the year. Planning your finances ahead of time can help you stay on track and avoid high interest rates in the future.
3. Only borrow because you NEED it not because you want it. Prior to taking out a debt consolidation loan, ask yourself if you are willing and able to change the behaviors that put you into debt in the first place. If you take out a loan to consolidate, make sure you are taking the steps to keep yourself out of debt in the future.
4. Personal loans have a fixed rate and fixed monthly payment, which makes it easy to budget your finances without having any surprises on what you’ll owe each month. Most credit cards have variable rates, so the rates you’ll pay can change monthly, quarterly, or annually based on interest rate changes in the market. By moving debt from a variable rate credit card to a fixed rate personal loan, you may be able to save money in the long run.
We routinely help borrowers consolidate high interest debt with hard money loans against their real estate. This won't be an option for many people in need a debt consolidation, but we've been able to help quite a few people drastically improve their finances overnight by providing them with these loans.
1. The key is to make sure that after consolidating debt, you don’t incur additional debt that you can't pay off.
The reality is that most consumers who choose to consolidate their debt end up with more debt a few years later, so don’t let debt consolidation provide you a false sense of security – or permission to yourself – to take on additional debt.
2. Beware of introductory "teaser" rates.
A lower-interest rate card may present an attractive offer to consolidate your debt, but beware of those cards that raise their rates after a set period.
3. Set repayment goals and stick to them
Ask yourself if there’s anything you need to change about your financial habits in order to make debt burdens a permanent part of your past. Then set a goal and create a schedule to pay off your consolidated debt by a certain time, and stick to it.
Credit card payments are calculated monthly and based on APR and unpaid balance, while personal loans have a fixed term where payments never change. If you are only paying the minimum on your credit cards each month, it can result in significantly more interest over the long-term.
There is more than one way to effectively consolidate credit card debt. Which solution you choose is based on how much debt you have to eliminate and your credit score. If you have a limited amount of debt and a high credit score, you may be able to use do-it-yourself options like a credit card balance transfer or personal consolidation loan. If you have a weak credit score or a large volume of debt, then you may be better offer consolidating through a credit counseling agency with a debt management program.
A debt management program can be extremely useful because you pay back everything you owe in a way that works for your budget. Credit counseling agencies work with you to create a plan and negotiates with the creditors to reduce or eliminate interest charges. As a result, you can get out of debt faster.
People often think credit counseling and debt management programs cause credit damage, but in fact the opposite is often the case. Borrowers who complete the program successfully have actually seen their credit scores improve rather than decline. This is due to the fact that the program helps you create a positive payment history while eliminating the debt you’ve been carrying. This improves the main two of the five factors that go into calculating your credit score. As a result, completing the program as planned will have a neutral or positive effect on your credit, instead of a negative impact like you might think.
1. Set the right debt management goals. Make sure you are using debt refinancing to improve your financial well-being. It can be a solid financial strategy if you’re looking to minimize interest costs, you have promotional or variable loan rates that are coming to an end, or you can save money by consolidating multiple debts into one payment at a lower rate. However, debt refinancing is not recommended to stretch monthly budgets. Extending payments over longer periods may be a more expensive way to pay off debt, and can be looked at negatively by lenders.
2. Learn what can be refinanced, as well as the time and effort needed to do it. Many people believe refinancing is only for credit cards. However, you can refinance many other kinds of loans such as those for a car, boat, motorcycle, RV, tuition, or even a timeshare. The process and time involved to secure refinancing varies. Some lenders require branch visits and/or paperwork, while others can be handled completely online.
3. Evaluate your current debt for opportunities to save. Obtain a free copy of your credit report through a credit bureau or online site. If your credit has improved since you originally financed, you may be able to refinance at a lower interest rate. Look at the amounts you owe and determine where you are paying the highest interest rates, which loans have the longest payment terms, and whether you have several debts that could be combined. Debts that are paid over a shorter term at a lower rate quickly yield savings.
4. Review different refinancing strategies.
· Balance Transfer: This can be a smart option if you are transferring credit card debt to a different card with a lower rate, or from a card with an expiring low introductory promotional interest rate to a new low rate card. Another way this can work is if you are consolidating debt from several cards onto one with a lower rate.
· Personal Loan: People with good credit may be able to obtain debt consolidation financing at a lower interest rate and/or shorter term than what they are currently paying.
· Home Equity Line of Credit (HELOC): Debts can be refinanced through a loan against the value of your home. Consult your tax advisor to determine whether the interest you’ll pay is tax deductible.
5. Shop interest rates and costs. Many companies offer debt refinancing, so it is important to shop around for the lowest rates. For balance transfers, an average three percent fee is typically charged. For example, a $20,000 transfer will cost an additional $600. Make sure the overall interest savings outweighs the cost and know that not every lender charges fees or points for a personal loan.
Debt consolidation has its place. Also, Debt Settlement can be a preferred activity when certain facts exist. Too often consolidation use fails because the debtor is unable to meet the initially established obligation.
My #1 tip to customers: be selective about the individual debts that are rolled into a new consolidation loan.
Everyone knows that debt consolidation is a particularly useful tactic. Rolling several high interest accounts into a single, lower interest loan saves consumer money. But, I always encourage folks to roll only their high-interest debts into a consolidation loan.
For example, student loans typically carry much lower interest rates than credit cards. Work with a debt counselor (do the math!) to figure out how much you’ll really save by combining student loan debt with credit card debt. Consider the time horizon, too. On a student loan, or any loan for that matter, you don’t want to roll in a balance that only has a few remaining months of payments.
In most cases, debt consolidation is unlikely to solve underlying debt problems. This is partially because a debt consolidation plan rarely addresses the root causes of excessive debt and the lower monthly payments may even encourage new spending. The best way to understand where debt consolidation often falls short is to compare it to Chapter 13 bankruptcy.
Debt consolidation often works by rolling your debts into a single payment that extends the repayment term. Similarly, Chapter 13 bankruptcy can also provide a borrower an additional three to five years to pay their debts while rolling all debts into a single payment.
However, a debt consolidation plan can last far beyond the three to five years a Chapter 13 plan takes. All the while, the individual is paying interest on the debt consolidation plan meaning that he or she will often pay more over the lifetime of the plan. Additionally, at the end of the debt consolidation plan, the individual will not receive a Chapter 13 discharge to eliminate all non-priority debt. Furthermore, a Chapter 13 plan requires the filer to undergo credit counseling and to adhere to a rather strict plan. These aspects of the plan can address problematic behaviors likely to lead to additional debt.
Another major difference with debt consolidation and a bankruptcy is that any debts that are settled for less than the total amount due in consolidation will result in taxable income for the amount of forgiven debt. However, in a bankruptcy, discharged debts are not taxable.
Don't forget to talk about tax debt settlement. If you've accumulated enough debt where you're researching consolidation, IRS difficulties may not be far behind. If you owe more than $10,000 in federal tax, or face liens or wage garnishment, a tax relief specialist can help you negotiate a settlement with the IRS.
1. Understand your options when it comes to student loan consolidation.
Consolidating student loans can allow a graduate, or a parent or grandparent holding Parent-Plus loans, to streamline loan, reduce interest rates on student loan debt, and cut the cost and length of loans. In order to select the best consolidation plan, consider what type or types of loan you are holding: federal student loans, private loans, or both.
With federal student loan consolidation, the borrower consolidates federal loans only. Consolidating allows the borrower to make one payment, instead of multiple, and to establish a new interest rate based on the weighted average interest rate of the combined federal loans. If you have a good credit score and want to lower your payments with a fixed interest rate, federal student loan consolidation may be right for you.
For borrowers holding only private student loans, private student loan consolidation can allow you to lower your interest rate and monthly payments, while at the same time establishing more flexible repayment terms. Once approved, the lender with use the new loan to pay off the original loans established for your education. Based on your overall credit score and income, private student loan consolidation can be an excellent way to reduce the burden of student debt repayment – and achieve savings of thousands of dollars over the life of your loan.
Borrowers holding both private student loans and federal loans can consolidate both, utilizing one lender that pays off both the original federal loans as well as private loans. Your financial and employment history, current salary, and credit score will play a role in determining your eligibility and interest rate. Borrowers can see savings in excess of $18,000 over the life of their loan.
It is important to consider any benefits you are receiving as a result of holding a federal student loan, such as loan forgiveness programs offered to teachers and borrowers employed by government organizations.
2. Consider whether your children are ready to assume responsibility for Parent PLUS loans.
Consolidation provides parents an opportunity to transfer responsibility for Parent PLUS loans to their child. If your college graduate is working and meets the loan criteria to take on this responsibility, consider consolidation as a strategy to enable you as a parent or grandparent to focus your resources on retirement.
3. Know your credit score and do your student loan consolidation homework.
Your credit score will have a definite impact on your ability to consolidate student loans and on the interest rate you secure. Having said this, don’t assume that a few credit dings will prevent you from achieving the goal of consolidation. Be sure to check your credit report with the major credit bureaus (Experian, TransUnion and Equifax) and ensure that any errors on the reports are addressed, prior to submitting your loan application. Not all lenders are created equal, and you will find in the marketplace that some require extremely high credit scores, while others recognize that life after graduation may come with occasional credit challenges.
4. Conquer and consolidate other debt.
Consolidating credit card debt can make a lot of sense for borrowers holding high-interest rate credit cards. Consumers can move balances from credit cards with high interest rates over to a single card with a low APR. Depending upon your credit standing, it may even be possible to transfer your balance to a card with zero interest for 6, 12 or 18 months.
5. Read the Fine Print.
Before choosing a lender or a credit card company to consolidate, check out sources like the Better Business Bureau to ensure you are choosing a good partner for your consolidation. Big upfront fees aren’t a requirement for consolidation – and you should beware of lenders that ask you to make big payments to start their process.
1) Create a plan and stick to it. If you are looking to lower your payments on a monthly basis, make sure you don't pay off your accounts, and then use them again. If you’re doing it to reduce your overall interest obligation, only consolidate debt that has a higher rate than the consolidation vehicle, loan, credit card etc.
2) Be careful of what you consolidate, especially student loans. If you consolidate student loans, you can actually end up paying more overall, and can lose some of the benefits on Federal loans if you switch to a private lender, such as some of the debt forgiveness programs.
3) Don't close the accounts you pay off! This can have a tremendous impact on your personal credit score, your score is based on several factors. Including length of credit history, and your overall debt mix. If you close old accounts, your eliminating that history, and possible the mix of debt you carry.
1) Interest rates today are typically under 4% for a 30-year fixed, adjusted for inflation which brings the cost of borrowing against your house ridiculously low. Consider consolidating your high rate credit cards and student loan (often also amortized over 30 years) into a consolidated Fixed rate mortgage. This will lower your monthly payments significantly in most cases and you may also have the added advantage of reducing your current mortgage rate. Check with your accountant as to whether you would enjoy taking an interest write for mortgage interest during a consolidation loan.
2) I’m sure others will also comment that taking advantage of 0% rate credit cards and combining higher rate cards into one is a great idea.
3) 401k or life insurance loans – in certain instances it may make sense to borrower from yourself to pay down high rate credit card debt or student loans.
1. Be clear if they are offering a loan or debt relief program.
2. Understand hidden costs like rate increases in the case of default, late payment fees and upfront fees.
3. Comparison shop for the best rate and conditions.
4. Look beyond the monthly payment. Compare the total interest you will pay over the life of the loan.
5. Be careful not to rebuild you credit card debt a second time.
1. Investigate whether lenders will lower the rates on existing card balances/loans as a first step. This can potentially provide immediate relief and entails the least effort. The worst they can say is no but often times they will be flexible to keep your business.
2. If the first option isn’t available or effective, then check out which balance transfer cards you might qualify for using an online tool like CardMatch (provided by CreditCards.com) or a prequalification tool provided by one of the major issuers on their website. This can show you what cards you qualify for without it affecting your credit.
3. Then, transfer balances to one or more new cards that offer a 0% APR introductory period of a year or more.
4. During the intro period pay down as much principal as possible and repeat the process (within reason) before the regular interest rate kicks in.
5. If the balance transfer credit card option isn’t available then investigate debt consolidation loans offered by local banks and credit unions or by major financial websites or peer-to-peer lenders.
Applying for new credit card accounts (or getting any new credit that entails having a credit report pulled) can negatively impact credit scores slightly in the near term. However, paying down debts over time will help credit scores, so it can be worth that short term effect. Once balances are paid down it’s best to keep balances low going forward and not to exceed 30% of any one card’s credit limit.
The Bright Side of Consolidating Your Debt
Turn multiple payments into one. There is no doubt that debt can become overwhelming. It can be difficult to keep track of each monthly payment or at which time each can be paid. Consolidating your debt allows you to make only one monthly payment and make your debt more manageable.
Lower your interest rates. Each of your debts has an interest rate. It is crucial to know all of your numbers. When you really sit down and assess how much you are paying in finance charges, you might be blown away. With only one loan payment a month, your interest rate can be drastically reduced.
A lower monthly payment. All of your monthly payments can add up. It happens to us all of the time, we get our paycheck and it is gone in a flash to all of our debt payments. With just one payment, you can lower the cost that you spend monthly in paying off your debt.
Why Take Caution on Debt Consolidation? It could be an enabler. We get into debt for many reasons, but one main reason is we spend more than we have. Don’t get me wrong, it is hard not to. But we develop bad spending habits or become financial zombies. We stay on auto pay, don’t manage our budget (or even create one), and we live paycheck to paycheck when we don’t need to. Putting all of your debt into one easy payment can give us the illusion that everything is ok, when of course it is not. You will have a lot of your funds freed up and this could mean big trouble. If you are going to travel this path, it is important to have a plan and realize your situation. If not, it could be an endless circle. The length of the loan. I understand that the interest rate is much lower and so is the monthly payment, but that could mean you take even longer to pay off your debt. The longer you continue to pay in small increments the more interest you will accrue. You may be paying more in the long haul just by taking more time to pay off your debt. It can be a slippery slope.
What can you do? One of the best ways to consolidate your debt, if you have it, is to use your home equity. If you own a house and have home equity in it, you can do a cash out refinance and pay off your debt that way. Otherwise, the problem is if your credit cards are all maxed out that means your credit score is low. So, no one is going to give you a really good rate on a new piece of credit because your credit score is already wrecked. The best time to get credit is when you don’t need it. That’s what is tough for people. There are some great zero interest credit cards out there you can use to combine a couple of balances and pay them off quicker. That is something I recommend people do. But you have to have a pretty good credit score to get the zero-interest card. So, if everything you have is maxed out, it is this big catch 22. The best course of action is to start paying those down. Making the payments, and paying the highest interest rate credit card off first so that you can save as much money on interest every month.
Personally, I never recommend clients to use debt consolidation services when a bankruptcy, if eligible, can get them to the same place within 90 days with nothing paid to unsecured creditors.
· Look for a fixed rate, fixed term consolidation loan that has NO prepayment penalty, charges no origination fee and has the lowest rate you can find. This will have the most neutral impact on credit and will allow for the fastest repayment terms.
· Don’t consolidate the student loan debt with other unsecured debt as you can most likely find a lower rate and better payment terms on the student loan debt if handled separately.
· If you use a debt consolidation company, check their Better Business Bureau (BBB) rating and also call the American Fair Credit Counsel for companies that they recommend.
A HELOC, or Home Equity Line of Credit, is once again an option for consolidating debt. For several years after 2008, banks curtailed their HELOC lending programs and so HELOCs were difficult to come by. Now, banks are once again pursuing HELOC business. What also helps is that in most parts of the country, home values have come back up or now exceed the pre-crash values so homeowners once again are finding themselves with equity rather than being upside down on their homes. However, the lessons of 2008 should not be lost on homeowners. Borrow responsibly, especially when one’s home is on the line. Debt consolidation should lead to an eventual reduction in debt and should not be used to free up more borrowing.
-Always first explore whether you are able to shift your debts to 0% (or low interest) balance transfer card.
-Some debt consolidation companies charge high fees -read the small print!
-Always compare the APR (annual percentage rate). The interest rate at the headline excludes extra fees such as the set-up fee.
I've consolidated most of my credit card debt and avoided interest. Credit card companies want your debt and are willing to take on your debt with the hopes of generating interest, so I strongly recommend transferring as much credit card debt to a new card with at least a yearlong 0% intro APR rate. Shopping around might land you some cards that have a 0% intro APR rate for 15 or 18 months, giving you up to two years to pay off a balance. Credit Karma offers a very useful platform for identifying cards with those features and shows results based on the user's credit profile.
Consolidating your credit card debt can potentially be a great move for both your wallet and your credit scores, as long as you manage the consolidation properly. Assuming that your credit is still in decent shape, other than your outstanding pile of credit card debt, then you can actually consolidate your credit card debt on your own. The most common options for credit card consolidation come in the forms of the balance transfer and the consolidation loan. With a balance transfer you typically open a new credit card and move all of your other existing credit card balances to the new account. This new account will often feature a low or even 0% interest rate (after a balance transfer fee) for a promotional period of time. Assuming that you aggressively pay off the credit card debt and do not get into any new credit card debt during this promotional period then the balance transfer option can potentially save you a lot of money. Using a personal loan to consolidate your credit cards can save you money as well, though typically not as much. However, paying off your revolving debt (aka credit card balances) and moving that debt into an installment loan may have a very positive effect on your credit scores. With either type of consolidation it is very important to break the habit of charging more than you can afford to pay off in a given month. Otherwise, you could be setting yourself up for major credit and financial problems in the future.
Consolidating your student loans can also potentially have a great impact upon both your monthly budget and your credit scores as well. Obviously if you reduce your interest rate and/or your monthly payment you could benefit financially from a student loan consolidation. However, when you reduce multiple, outstanding student loan accounts down to just one new account with a balance your credit scores could be positively impacted as well. One of the factors which FICO and other credit scoring models consider is your number of accounts with balances. When that number of accounts is reduced through a consolidation you might see even a slight upward bump in your credit scores.
Consolidating a credit card: Consolidating a credit card has its pros and cons, it really depends on your financial situation. You can consolidate your credit card by choosing a balance transfer credit card. This allows you to transfer all of your credit card balances over to one card, usually with a small fee. There usually is a 0% interest-free period; this is usually the first 12 months.
· If you plan to pay off the full amount of debt on you card in a year, then I recommend taking this option. If you don’t think you can do that, then I highly recommend choosing a different option to help you; you will only fall into more debt. I recommend choosing this option if you have multiple credit cards with very high interest rates and your financial situation is doing well. A 0% balance transfer card has no interest for the first 12 months, so you won’t have to pay the high interest you are currently paying on multiple cards and you will have one monthly payment instead of several.
TIP: Before choosing any option such as consolidating a credit card, I recommend, first, sitting down and creating a budget (if you don’t have one already). First, ask yourself, what is your income to expense ratio? How much are you spending on essential and non-essential expenses every month? If you are spending more than you are earning, then you might want to take a step back on trim down some of your expenses. If you have multiple credit cards with high interest rates and a balance, then try and tackle one at a time. Make sure you still pay your credit card every month, but consider making multiple payments on the highest interest rate card to get that down. Once you have it at a 0$ balance, then tackle the next one.
Consolidating a student loan: Student loan consolidation is when your lender combines all of your loans into one loan. The lender chooses an interest rate based on the interest rates you currently have, your financial history or track record of handling debt. The ideal option is to get a loan that is a lower interest rate than your current loan, but sometimes this isn’t always the case. You may end up paying more in interest in the long run with this type of loan.
· If you are struggling to meet your monthly payments, then there are other options besides consolidation like income-based payments. Before choosing to consolidate your student loans, speak with a financial advisor or debt councilor to help you go over your repayment options.
Working with a debt consolidation company: Before you choose to work with a consolidation company, do your homework. Working with a debt consolidation company can be like paying off debt with debt. For example, let’s say you have $50,000 in credit card debt. The company will pay off all of your creditors and then pick an interest rate and a loan for you to pay them, sometimes this interest rate is extremely high and you might end up paying more to the company in the long run.
· Before choosing this option, you might want to look into a debt settlement company. Make sure the company you choose is BBB Accredited, or a law firm, so they are more credible and trustworthy. It is always important to read the fine print and make sure you won’t be paying more in fees and monthly payments. A debt settlement company won’t charge you in interest, they will simply negotiate with your creditors in-house to reach a settlement and a lower monthly payment for you.
How does consolidating debt affect one’s credit score? This depends on how you plan to consolidate your debt. If you choose to get a new credit card, then this will be a hard inquiry on your credit report, which will result in a small drop on your credit score. In the end, before choosing any option, you might want to consider speaking with a debt attorney or financial advisor to go over if this is the best option for you. Consolidating sometimes can be the last resort depending on your financial situation. Don’t fall into more debt from your debt! Choose an option that will reduce your monthly payments and save you money!
Call them, and try a free consultation. Make a list of questions before calling. Being prepared for this is important. Ask specific questions relevant to what you are trying to accomplish. Get answers to things like: What’s your fee? How do I verify my accounts are being paid? Success rate? Will lenders call me? What do I do if someone tries contacting me? If I pay-off early is there a discount? How do I opt-out? You should feel comfortable with the person you’re speaking to. If they’re pushy or aggressive, or if you feel uncomfortable, that’s a big red flag.
Search the Better Business Bureau (BBB) for the loan consolidation company you're considering working with. If they have a good rating, chances are, they're working with clients in an ethical, trustworthy manner and may be a good option. If you cannot find them, search elsewhere. Read reviews and try to get a feel for what to expect.
Follow them on social media. Are they sharing great, free, valuable content? Do they respond to your tweets and comments? How a company interacts with and provides help to their social media following, says a lot about how they will interact with and support their customers.
1. You can't dig yourself out of a hole with a shovel. Unless you change the spending behavior that got you into debt in the first place, a consolidation loan will only postpone the day of reckoning.
2. Avoid consolidation loans which require automatic payments from your bank account. Your debt payment, while important, should not be put first in line for payment ahead of house payments, taxes, groceries, and other essentials.
3. Consolidating student loans can make sense, but do not payoff federal student loans with a private loan until you understand all the protections you are giving up, such as deferment opportunities, income based repayment options, etc.
As a lender, I see many people refinance their homes to consolidate their debt. With mortgage interest rates holding under 4%, it is a very cost effective way to clean up your finances.
Common debts that are consolidated in mortgages are:
· Student loans. Student loans often have a family member, such as a parent, attached. Consolidating this debt can free that person of the liability. That may be an issue when they look to take out their own credit.
· Credit card balances. 20+% interest rates can wreak havoc on paying off your credit cards. capsuling the balance into a low interest rate mortgage can significantly lower your monthly payment.
· Pay off judgments. This can dog you, having a negative impact on your credit score
· Consolidate other loans and mortgages. Things like home equity loans often have adjustable interest rates. Eliminate the fluctuation with one low monthly payment
Paying off credit card balances can be a slippery slope.
If you are prone to clear out your balances, only to go out and run them up again, you should re-think that refi and consider budget counseling.
Advice on consolidating credit card debt:
1. Research your options. Debt consolidation means combining and downsizing debts so they are easier to repay – getting all debts “under one roof” and at a good interest rate. There are many ways to consolidate debt. Options include:
a) Balance transfer
b) Debt consolidation service
c) Personal loan (a fixed, amortizing installment loan (often called a debt consolidation loan)
d) Other methods, but they generally pose high risks to one’s own assets (such as borrowing from a 401(k) or life insurance policy, or against a home).
2. Consider debt consolidation if you have too many credit cards with too high interest rates. Do NOT consider debt consolidation if you are unable to make minimum payments on current debt. In those situations, look into debt negotiation (settlement) or credit counseling.
3. If your credit scores do not reflect your actual repayment capabilities and credit-worthiness, consider a personal loan from one of the several private companies that have emerged to offer these to consumers.
Traditional credit data is limited in that it doesn’t fully account for a consumer’s complete financial profile and his or her total ability to pay his or her debts. The new independent lenders use different criteria than a traditional bank or credit union to evaluate how likely a person is to repay a loan. Some, like FreedomPlus, will have a direct conversation with the consumer that allows the consumer to provide information and context about their credit scores and profiles, about savings they may have accumulated, life insurance they may hold, and other factors that indicate they are financially responsible.
Advice on choosing a debt consolidation company:
1. Be wary of companies that make specific promises before they review your individual situation, or that pressure you to sign up immediately or send money before an agreement is created. A trustworthy company will be honest and communicative with prospective clients.
2. Understand what the company offers. In other words, what type of debt consolidation is it? If they offer other debt relief services, can they explain those well and help you make the best decision?
3. Make sure to understand all fees. If you are using a debt consolidation service, these companies can charge high fees. If looking at a personal loan, look at the origination fee, which usually is 1-5% of the loan amount. For someone who can pay off their debt within a year, it generally is not cost effective to use a personal loan to do so.
Also, for personal loans, look at the interest rate. These loans can provide lower rates than many credit cards, but the rates are not exceptionally low. Where credit cards may have 15-25% rates, a personal debt refinance loan can lower that rate by 2 to 4 points. So, if you repaid $10,000 over 60 months at a 20 percent interest rate, you would pay $265 per month. The interest fees you paid would total $5,894. If you could lower the interest rate to 16% with a personal loan, over the same 60-month period, you would pay $243 a month and save more than $1,300 in interest expenses.
4. Find out about educational material. Does the company provide educational material, including budgeting and financial advice, free of charge? Many firms consider educational material an additional fee source, not a benefit to their clients.
5. Check into the background of the management team. Look for good, relevant education and experience – not a team that jumps from opportunity to opportunity to make a fortune.
6. Review the company’s history. How long has the company been in business? How many customers has it served? Determine if the company and its own employees are those who will actually provide service through the life of the program, or if they contract out to others once they have enrolled a client.
Credit card debt can be hard to deal with when you have your balances spread across multiple cards and find yourself paying high interest. In order to alleviate some of the stress, pay off your debt faster and simplify your bills, take advantage of 0% APR offers that come your way. Transfer as much of the debt as you can to that card. Not only will you find yourself paying off the debt faster, but you will be able to pay off more than the interest.
When looking for a debt consolidation company, find one that that doesn't try to persuade you to choose debt management or settlement, as that's not what you wanted and don't need anyone to negotiate with your creditors. Stay away from companies that reach out to you, as they are not looking out for your best interest, as well as companies that are trying to pressure you into taking a loan that you can't afford. Don't pay any upfront fees and don't trust anyone that guarantees you a loan without having prior knowledge of your income, credit score, and other personal information.
Contrary to popular belief, a debt consolidation loan can have a positive impact on your credit score. By consolidating debt into a secured or unsecured loan, your credit utilization ratio will decrease and your credit score will increase, as it appears that you paid off your credit cards. Remember not to close the credit card accounts after you consolidate your debt, or the opposite effect will happen.
If you use debt consolidation as a cure-all. If the ultimate goal is to climb out of debt, consolidation loans don’t have a good track record. Estimates suggest that at least 70% of those who consolidate their debt end up with as much or more debt a few years later. For example, one might consolidate credit card debt into a single loan, only to max out the credit cards with the newly found available credit. Think of it as yo-yo dieting, only with debt.
Why does this happen? Because getting a debt consolidation loan to make your payments more manageable doesn’t require you to change your behavior. It’s similar to losing weight with a dieting pill; if you don’t also adjust your eating habits, you’ll probably pack the pounds back on once you quit using the pill.
This isn’t to say consolidation loans are bad. They can be useful tools for managing and paying off. However, they’ll only work over the long term if you can be financially disciplined enough to change your lifestyle so that you don’t go into debt again.
1. It's a third-party payment system. Tired of juggling many different accounts? With a debt-management plan, you make one payment to the credit-counseling agency, which distributes the money to your creditors until they are paid in full. These agencies do not make loans, nor do they settle debts. Instead, they have preset arrangements with most financial institutions, many of which lower interest rates and fees, so more of your payment goes toward the balance rather than finance charges. However, if you just happen to have accounts with creditors that don't offer any concessions, that benefit is reduced.
2. Agencies range in quality. With something as precious as your finances, be exceedingly careful about who you work with. Look for a nonprofit credit counseling organization that belongs to either the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). They ensure member agencies pass rigorous standards set forth by the Council on Accreditation or another approved third party, and that their counselors pass a comprehensive certification program. Even if they are members of such organizations, though, be picky. The agency should be organized, send payments and statements on time, and offer strong consumer education and support. If it falls short, contact another branch.
3. All plans are basically the same. Financial institutions don't give preferential treatment to any one organization, nonprofit or otherwise. So while the agencies and employees vary, the plans are all structured the same way: Your counselor determines how much it will take to pay your creditors in full in three to five years. The payment is usually around 2.5% of the total debt, though in hardship situations, there is some wiggle room. You can stop the plan at any time, and you can also pay more – and get out of debt faster – when you have extra funds.
There are several ways consumers can lump debts into a single payment. One is to consolidate all their credit card payments onto a single new credit card – which can be a good idea if the card charges little or no interest for a period of time. A second way, for those who qualify, is to get a debt-consolidation loan from a bank, credit union, or debt-consolidation service. Home equity loans are a third, excellent form of consolidation for some people, as the interest on this type of loan is tax-deductible for borrowers who itemize deductions. There are also several consolidation options available from the federal government for those with student loans.
Another approach – especially for those who do not qualify for any type of loan – is working with a debt-relief organization or credit-counseling service. These organizations do not make actual loans; instead, they try to renegotiate the borrower’s current debts with creditors. However, these groups often charge hefty initial and monthly fees, and their tactics could lower the borrower’s credit score. A good debt-management plan will never do this except, perhaps, for a short time at the beginning of the process.
Although debt consolidation loans can offer some relief, they have some downsides.
One of the biggest is interest rates, starting with a higher rate. You may have to pay high interest rates and fees if you have bad credit.
Even if the rate is reasonable, having a lower monthly payment will likely mean that you'll be paying back what you owe over a longer period of time than if you hadn't taken out a consolidation loan. That will result in paying more interest over the life of the loan.
That’s why doing your homework is important. Call your credit card issuer(s) to find out how long it would take to pay off the debt on each of your cards at its current interest rate. Then compare that to the length and cost of the consolidation loan you're considering.
There could be steep penalties and fees if you miss a payment. Your interest rate could also be raised in this instance.
What's more, debt consolidation loans aren’t necessarily a credit score’s best friend right off the bat. If the loan is reported on your credit report, it will temporarily lower your credit score. That is to say, lenders interpret having a debt consolidation loan as a sign that you have debt you’re unable to manage without one – a situation not viewed favorably by potential lenders.
And, of course, just as with any other type of credit account, a missed payment on a debt consolidation loan will be reported on your credit report. That can lower your credit score.
In most cases, credit card consolidation is a wise decision if you are able to get a lower interest rate with the new company at no or minimal cost to you. A credit card balance of $15,000 with a 19.9% interest rate could cost you as much as $2,985 in interest charges alone in a year if you continue to carry the same $15,000 principal amount. If you're able to consolidate your credit and reduce your interest rate down to 9.9% (through a consolidation move), you would decrease your annual interest down to $1,485 (assuming the same $15,000 balance throughout the year). This savings on interest can then be applied to your principal amount to help you get your debt paid off faster.
How can you consolidate? One method is to check the rates on all of your credit cards and compare them from high to low. Once you've found the lowest one, check your credit limit to see if you have any room for consolidation to that card. If not, try giving the credit card company a call to see if they will increase your credit limit because you are doing a consolidation. Be aware that some companies will charge a balance transfer fee on the transfer amount. It is important that you make every effort to have this transfer fee waived. However, if they won't budge on the fee, sometimes paying a fee is still worth it if you can reduce your interest rate by more than the fee charged. You'll need to get out your calculator and figure out if you'll still save some money.
Debt consolidation doesn’t get rid of debt. What it does is consolidate multiple accounts into one.
The total monthly payment amount might go down, but total amount of interest paid and the length of time to repay all of the debt will likely rise.
Once credit card accounts are paid off, think hard about whether to close them to avoid the temptation of running up new charges. Keeping paid-off accounts open after consolidation puts the borrower at risk of taking on even more debt.
Mistake No. 1: You don't take care of the actual problem. While consolidating your debt will help you manage it better and save you money in interest, it won't prevent you from overspending, which is most likely what got you into debt in the first place. In order for debt consolidation to work, you have to get to the root of the problem. Consider cutting up your credit cards or keeping them out of your wallet. Or, pick up a side hustle or second job to help pay for your extra expenses. Changing your habits is crucial for getting out of debt.
Mistake No. 2: You don't know your options. There are numerous debt consolidation scams out there. If a company is charging outrageously high fees or wants to take funds directly out of your bank account, run fast. True debt consolidation consists of four different options. You can take out a personal loan with a fixed interest rate and pay off your debts with that loan, you can open a 0% APR credit card and transfer your debt to the new card to save on interest, you can take out a home equity line of credit on your home to pay down your debts, or you can work with a trusted company to negotiate your debts with your creditors.
Mistake No. 3: You don't shop around. Just like you would shop around for a camera or shop around for a mortgage, you also need to shop around for the best debt consolidation company. Different lenders will offer different rates and different terms, so do your research before signing on the dotted line.
Mistake No. 4: You don't change your lifestyle. After you consolidate your debt, you have to ask yourself what got you there in the first place. If it was an emergency, perhaps you need to work at building a solid emergency fund in case something were to happen again. If you can't afford your current bills, perhaps it's time to downsize your home, stop eating out, or cut cable. If you simply just spent too much money, reassess how you're spending your free time. Go on a hike instead of browsing the mall, read a book instead of shopping online, or go through items you already own before purchasing something new.
Mistake No. 5: You don't know which debts to consolidate. You can consolidate credit card debt, student loan debt, and other types of consumer debt, but that doesn't mean you should consolidate everything. Look at all of your individual debts and write down the interest rate. Debts with high interest rates (such as credit cards) will want to be consolidated. However, you might not want to consolidate your student loans if the interest rate is better than the new one you would receive. With student loans, sometimes refinancing is the way to go to lower your payment and help you save money on interest.
Balance transfers are performed by switching one credit balance over to another credit card, usually for a low promotional rate over a limited time period. For example, it's not uncommon to receive a balance transfer offer that has a 0% annual percentage yield over the first six to nine months after opening the new account.
Personal loans should not be confused with peer-to-peer loans, although both are possible consolidation options for your credit card debt. Personal loans are provided by banks and credit unions and can come in secured or unsecured forms. These loans typically have lower interest rates than credit cards, especially if you secure the loan by pledging an asset, such as your car as collateral.
Which option you choose depends on multiple factors. For example, how your debt is currently distributed might limit your options. Even though many credit card issuers allow you to transfer over balances from multiple cards into your new card, not all do. Additionally, credit card balance transfers only make sense if you can pay off all or most of the debt during the promotional rate period. After the promotional period ends, you are likely to face another high interest rate on your balance, in which case a personal loan is probably the cheaper option.
If you think you can successfully manage your debt, then ask yourself a few more questions.
Can I pay off the debt in six months to a year? If so, it may not be worth the time and effort to consolidate. You might end up paying a few extra bucks of interest, but probably not much more.
Can I get a lower interest rate on my current debt just by asking? You can always try calling up your credit card issuers and requesting lower interest rates. If you’re a long-time customer and have paid your bills on time, you stand a chance.
Am I ready to change the spending patterns that built up the debt in first place? You’ll need to think about which options are open to you, given your credit history and assets. A long credit history and good credit scores are necessary to qualify for 0% balance transfer credit cards and the best rates on personal loans. You still may be able to find a personal loan even if your credit history isn’t long or good, but you’ll likely pay higher interest.
You also can borrow against the equity in your home, a retirement account, or a life insurance policy.
Avoid surprises: Before you start, get a handle on your credit scores and get a free copy of your credit reports. Clean up what you can.
If debt has taken over your life, then debt settlement can help reduce your costs and make paying off your debt possible. When looking for the right debt consolidation company for your financial needs, be sure to talk with two or three companies. It is important to remember that debt relief services are not a “get out of jail free” card. Working with these companies can negatively impact your credit score for up to 10 years, but it is better to work with such companies than to default on loans or file for bankruptcy.
Let’s say you have four credit cards with balances and interest rates ranging from 18.99% to 24.99%. Although you do have debt, you always make your payments on time, so you have decent credit and qualify for a loan at 7%. You should consolidate these debts because you’ll get a lower interest rate.
On top of that, if you consolidate using a loan, there’s typically an end point. For instance, a loan with a three-to five-year loan period will be paid off in three to five years just by making the minimum payment. If you only make the minimum payment on your credit cards, it could take months, years, or even decades to pay off your debt, all while accruing more interest than your initial principal.
Credit card balance transfers and credit card debt consolidation make sense if you’re in the red on your existing plastic and need a way to reduce your interest rate(s). Not only will you save money on finance charges, but you’ll be able to repay your debt faster. After all, interest has a way of eating into your payoff progress!
However, there are some pitfalls to watch out for with credit card debt consolidation and credit card balance transfers:
Fees – Transferring a balance to a 0% card isn’t free. You’ll usually have to pay a fee of 3% of the balance transferred. Choosing other consolidation options can also result in fees; for instance, some personal loan issuers charge an origination fee. Be sure you know exactly how much it will cost you to reduce your interest rates!
Late-payment repercussions – If you make even one late payment during your 0% balance transfer promotion, your deal might be canceled and your could have to start paying interest immediately. If your on-time payment record is spotty, other consolidation options might be worth looking into.
Credit – In order to qualify for a 0% card or get the best rate on another type of consolidation loan, you’ll need very good credit. If this doesn’t sound like you, you’ll have to do the math to decide if consolidating is a good option at the rate you are able to get. Again, be sure to shop around – there are a lot of personal loan options out there.
Ending up back in the hole – Whether you transfer your balance onto a 0% card or consolidate your credit card debt with a loan or lower-rate card, you’ll end up with at least one paid-off card in your possession. Resist the urge to charge it back up, or you’ll end up with more debt than you started with.
If you're planning to use a debt consolidator to make sure that your debt gets wiped out faster and you're spending less in interest, then there are some important factors to take into consideration.
Is there an origination or early payment fee? This could make it so the consolidation isn't worthwhile.
Are you extending your repayment time period? Lengthening the time on the loan may mean lower monthly payments, but overall you pay more.
Are the interest rates fixed? Adjustable rates almost always mean low rates now and high rates later.
How is your credit? Discuss this with a reputable consolidation company, and make sure consolidating won't hurt your credit.
Have a debt-free plan before you consolidate. Otherwise, you will end up back where you started before consolidation.
Financial freedom can only be attained if you wipe out the debt. Debt consolidation may be the right choice if it helps you get rid of the debt faster and helps you pay less in overall interest expenses.
The best scenario to use debt consolidation is when you're able to get a lower interest rate than your current loan. For example, let's say you have three credit cards that have balances and APRs of 19%, 23%, and 25%.
If you are able to transfer those balances onto one new card with an APR of 0% for 12 months, then you may be able to save money while consolidating your debt.
But APRs aren't the only thing you need to compare. Many debt consolidation programs extend your payment plans, so even with a lower rate, you could still end up paying more over the long haul. Make sure to compare the total cost of interest that you will pay over the entire term of your current loan compared to the new loan. This will ensure you make a decision that will save you money, instead of spending more of it.
It's nearly impossible to get out of student loan debt – you can't ignore it or write it off. One thing you can do, however, is apply for a student loan refinance.
When you have multiple loans, this option is a way to streamline them, and you may be able to improve your interest rate. But do the math: If you're adding months or years to the loan, you can also be spending more on interest over time. Other options you could consider if you're having trouble making the payments are deferments or forbearance, which can give temporary relief without resulting in a default.
Another thing to note: If you're consolidating student loans, you may also lose some of the specific attributes from the original agreement, such as the ability to defer or loan forgiveness.
The biggest mistake people make is picking the solution to deal with their debt ahead of figuring out what their goals are. I've watched so many people leap at solutions only to make mistakes that cost them millions in lost retirement savings.