Do you feel like you’re struggling to keep up because you’re drowning in bills each month? Have you ever wondered what is debt consolidation, and is it right for me?
Paying the minimum balance on multiple credit cards and not being able to get ahead is absolutely no fun! It’s stressful and unnerving but you’re not alone. In fact, statistics show that most Americans are currently in debt.
Yes, this report states that 80% of Americans have at least one source of debt in the range of student loans, credit card debt or a mortgage.
If you’re in a spot where adulting is no longer fun, I understand. Let’s dive in and figure out what we can do to get rid of debt and get your finances back on track so you can begin living life again!
WHAT IS DEBT CONSOLIDATION?
Debt consolidation is a type of debt refinancing that allows consumers to pay off other debts.
Basically, debt consolidation helps you combine all your debts into one single payment with a new interest rate.
The goal of debt consolidation is to reduce the number of bills you’re tracking and the interest rates that go along with those bills.
WHAT IS A DEBT CONSOLIDATION LOAN?
A debt consolidation loan is any loan you take out to pay all of your existing debts. Often times debt consolidation loans offer lower interest rates and extended terms compared to your current payments.
Debt consolidation loans can come in the form of a balance transfer credit card, a home equity loan, a personal loan, debt consolidation loan or a 401(k) loan.
TYPES OF DEBT CONSOLIDATION
As mentioned above there are various ways you can consolidate your debt. I’m not a big fan of extending yourself beyond your means so the options below are my preferred methods.
Balance Transfer Credit Cards– This is the exact method I used to get out of credit card debt several years ago. If you’re unfamiliar how these cards work they’re pretty simple. HOWEVER, do the math to make sure they are a fit for you.
A balance transfer credit card typically offers a promotional 0% APR for a limited period of time, mine was 18 months. I transferred my high interest credit card balance over to a card with 0% APR and was able to pay it off in less than 12 months.
If you don’t foresee yourself paying off the balance in full prior to your promotion ending this isn’t your best option. The reason being your interest rates will spike once the promotion ends.
If you choose to go this route make it your goal to have it all paid off within the promotional offer.
Full Disclosure: If you’re not in a place where you feel you can be responsible with credit cards this may not be the best route. The only way this will benefit you is if you pay your debts within the promotional period.
Personal Loans– Are a popular choice for some people because they can be repaid over one to seven years and can sometimes offer lower interest rates than credit cards. Personal loans typically range between 5%-36% interest depending on your credit score.
HOW DO DEBT CONSOLIDATION LOANS WORK?
Because debt consolidation can be overwhelming to anyone dealing with financial issues let me give you an example:
Let’s pretend a person owes a total of $7,000 on 4 different credit cards with interest rates varying from 17.99%-24.99%. This person has an excellent credit score but is having a rough time making these payments.
This person may choose to take out a $7,000 personal loan at a lower interest rate like 11% and pay off all of their credit debt at one time. Doing this will save this person a ton of money by paying less interest overall.
DEBT CONSOLIDATION BENEFITS
OK, there’s pros and cons to debt consolidation it really depends on your situation and how far you’re willing to go to eliminate your mounds of debt.
One of the benefits to consolidating debt is you’re only responsible to make one payment per month instead of keeping track of all your debts. This is good for someone who has a difficult time keeping up with multiple card payments.
Another benefit is you’ll only have one interest rate (hopefully much lower) to worry about now. This new lower interest rate will allow you to kick your debt payoff into high gear.
CONS OF A DEBT CONSOLIDATION LOAN
Debt consolidation loans can be difficult to be approved for if you have poor credit. People who are approved with lower credit scores are often stuck with less than desired interest rates.
Another thing to remember is fees such as loan origination fees or balance transfer fees can add up and become quite expensive.
Please don’t get the wrong idea by thinking if you do a debt consolidation program your debt with just magically disappear. Honestly, I wish this was the case but it’s still there. It’s that ghost that keeps haunting you. Booooo!
WHAT TYPES OF DEBT CAN I CONSOLIDATE?
So you may be thinking this whole debt consolidation is right for you but you’re wondering how far can I go in consolidating the my various debts?
Debt consolidation can be used on almost any type of unsecured consumer debt. Such as:
- Credit cards
- Medical bills
- Student loans
- Bill that have gone to collections
- Payday loans
IS DEBT CONSOLIDATION RIGHT FOR YOU?
Debt consolidation works well for some but it’s not for everyone. Typically debt consolidation is a good option for people who have a good credit score but have have run into a “life issue” causing them to fall behind on their debts and or payments.
I like to refer to “life Issues” as: You were laid off from a job but are now back to work. You had a family member pass and now you’re trying to sort out financial issues.
If you find yourself in any of the following situations below you may discover that debt consolidation isn’t for you. In this case it’s probably best to figure out an alternative solution to your debt issues.
YOU HAVE BAD CREDIT
Poor credit affects our lives in so many different ways. Your 3 digit credit score can seem like this evil number if you’re struggling with your finances.
Unfortunately, you’ll find if your score is lower than 620 you’ll have very few lenders to choose from to consolidate your debt.
Another side affect of having a low credit score is you all of a sudden become a target to scammers. So please be very cautious when looking for help.
YOUR DEBT PAYMENTS MAKE UP MORE THAN HALF OF YOUR INCOME
I know we all get carried away and charge some things here and there. But if most of your paycheck is going to pay off your debts it’s less likely you’ll be able to get ahead.
One unfortunate accident like a fender bender or an ER visit can drown you in debt forcing you to file for bankruptcy.
YOU’VE HAD SOME RUN-INS BEFORE
If you’ve been in the unfortunate situation of being sued over your debt and you are now looking to consolidate your debt its best that you contact a bankruptcy attorney to get some expert advice on what you should do.
YOU LIVE WITHOUT A BUDGET
Ok, here comes some tough love. If you aren’t putting any effort towards maintaining a budget or haven’t even tried to start one debt consolidation probably isn’t a good option for you.
If you don’t fix the problems that got you into debt in the first place you are going to end up back in this shit show again.
Create yourself a budget and commit to living your life with it regularly. If you need help creating a budget that works check out this 8 step budgeting article to help you out.
FINAL THOUGHTS ON WHAT IS DEBT CONSOLIDATION AND IS IT THE RIGHT OPTION FOR YOU…
I hope you have a better understanding of debt consolidation and if it’s right for you.
If you’re considering debt consolidation please take some time and make sure you’ve done the necessary research prior to moving forward. There’s many other resources available.
Here are some links to answer some of the most common questions about debt consolidation.