It is an unfortunate fact of life: too many Americans are under a seemingly unscalable mountain of debt. We are either paying high-interest minimum payments on monthly balances or dodging collection agency calls. Even stopping all unnecessary spending and adopting good financial habits doesn’t always negate emergency expenses, frivolous past spending or ill-informed financial decisions.
For many of us, getting out from under debt might seem like an impossibility.
But have you ever considered consolidating your debt? It entails rolling all your outstanding balances into a new loan with one monthly payment. The interest rate is lower, so you save money. You could also get a personal loan to pay off those disparate outstanding bills. These are options you might not have considered but should.
Consolidating debt: The big questions
As is always the case when making any significant financial move, it is important to ask some pertinent questions before starting down a new financial path:
- What is debt consolidation?
- What are debt consolidation options?
- How does debt consolidation affect your credit score?
What is debt consolidation?
Debt consolidation is the act of combining your various outstanding balances/debts into a new loan with one single payment.
The headache of trying to keep track of all our outstanding balances often leads to missed payments and generally makes it harder to plan for future expenses. But with debt consolidation, you make one payment as opposed to a bunch of them. And that combined payment is often less than the original balances because the interest rate is lower. That lower amount could have you out of debt in a more reasonable amount of time. How great would it feel to get your finances back on track?
Sounds good, doesn’t it?
Here are the various ways you can do it.
Debt consolidation options
Depending on your credit score, you might be able to consolidate your outstanding debt onto one credit card. For new credit cards with no-to-low interest rates, a balance transfer can help you pay off your debt. Just make sure you can pay it off before the interest rate skyrockets after the introductory period expires. You can also transfer your debt to an existing credit card if they are running a promotion with a fixed rate or low-interest rate.
Some creditors may offer a hardship program where you pay a monthly agreed-upon amount over a longer period. In addition to making your payments more manageable, you can save money by avoiding extra interest. You need to reach out directly to your creditors to discuss this option.
For example, if you owed $7000 on a credit card you could offer the issuer a lump sum payment of $3500 to settle the debt. If you can prove that you are suffering from serious financial hardship, the credit card company might agree to settle for that amount. You will need to have documentation to prove you have a serious financial hardship including:
- A list of all your debts
- The amount you owe on each debt
- The last time you were able to make a payment on your bills
- Any minimum payments
If you own a home, a HELOC may be a good option. A HELOC is a home equity loan or a home equity line of credit. The amount is based on your home value, and it serves as a second mortgage or open line of credit. Some HELOCs switch from a fixed rate to a variable rate after the first six months. But the interest rate is usually less than what a credit card company charges.
As these two words indicate, you are taking the amount you owe from one or more sources (credit card balances being one of the most common) and moving/transferring those balances to another credit card account.
Taking all your open balances and transferring them to one card can be incredibly beneficial. Firstly, a card with a lower interest rate than any of your current credit cards will have you
paying less overall. What is even better is if you are eligible for a 0% interest rate card for a prescribed period. You can really get ahead of your combined balance, maybe even pay it all the way off, under a 0% interest rate.
Remember to read the fine print when engaging in a balance transfer. Some credit cards charge balance transfer fees. And be sure to calculate your new APR (or the annual percentage rate interest applied to this new credit card account). Also, pay strict attention when a 0% rate ends. You also must be aware that you could see a certain APR for the balance transfer you make but a higher rate if you use this same card for purchases after your balance transfer.
If you have applied for and been granted a new credit card at 0% interest, transferring your balances is smart. But be sure you can pay back the loans before the special rate expires. And if you don’t change your spending habits, you could find yourself right back at square one.
National Debt Relief offers debt consolidation and other options to help you pay off your debt for significantly less than you owe.
Debt consolidation and your credit score
Checking your credit report and score is the quickest way a lender can determine if you are a good candidate to pay back the loan. As you might expect, debt consolidation can temporarily affect your score, but it should rebound as you pay off your debt.
Consolidating debt could lead to significantly lower interest rates on your monthly payment. This might lead you to pay off your outstanding balance sooner, plucking yourself out of debt well before you expected. And the sooner you reduce the amount you owe or pay it off entirely, the sooner you can boost your credit score.
In taking debt from a few maxed-out cards and rolling them to a card with a higher/newer line of credit, you also reduce your credit utilization—the ratio between your outstanding balance and what your limit is on that balance. This could also cause your score to rise.
The more payments you make on time, the longer your healthy payment history is. This could also cause a rise in your score because the effect of debt diminishes over time.
Hard credit pull
Any time you try to get a loan or even a new credit card, the lender makes what is called a ‘hard inquiry‘ into your credit. This look into your credit can temporarily impact your score. Too many hard credit pulls over a short period of time will certainly have a negative effect. And if you default on a new consolidation loan, this will undoubtedly impact your credit score and place you deeper into debt.
Only you can determine which method of debt consolidation might work for you. As with anything you undertake where money is concerned, tread cautiously and weigh your options. No matter what debt relief option you choose, you are headed in the right direction by tackling your debt now.