Thursday, November 24, 2022

What Does Consolidating Credit Card Debt Mean

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The good news is that the limitations that you see with do-it-yourself debt consolidation dont affect people who want to consolidate with a debt management plan, Herman says. There are never any credit score or debt-to-income ratio requirements you must meet to enroll in a debt management program. You can use the program regardless of how low your credit score is or how much debt you need to consolidate.

This means that people who want to consolidate still have a way to do so even if they cant qualify for the do-it-yourself options.

Credit card companies want to work with people, Herman encourages. Working with a credit counseling organization like Consolidated Credit shows them that youre serious about pay back everything you charged on your credit cards. So, we can work with them to reduce or eliminate the interest charges applied to your balance and find a monthly payment that you can afford. Its a great way to consolidate for those who cant successfully consolidate on their own.

When Is Debt Consolidation Not A Good Option

Debt consolidation is not going to work for everyone for the simple reason that habits and motivations are different in every household.

If you use credit cards to pay for impulsive or excessive shopping , consolidation is not a good option.

If you got into trouble because you dont have a budget or wont stick to the one you do have or arent disciplined enough to make on time payments, then debt consolidation wont work. The same problems that got you into trouble, will continue.

From a practical standpoint, if you can pay off your debts in 12-18 months , consolidation isnt necessary. Just do it! The fees and time associated with getting a loan wont be worth it.

Your best bet is to seek the free advice of a nonprofit credit counselor. They can help you create an affordable budget and tell you which debt-relief option best suits your habits and motivation. And the advice is FREE!

Do You Have To Consolidate All Your Debt

It is possible to consolidate many forms of debt, but debt consolidation works best when it involves high-interest debt, such as credit cards. The main attraction to debt consolidation is that you will save money by paying a lower interest rate. Some debt, such as medical bills , car loans and mortgages already have a low or no interest rate, there is no advantage gained in consolidating them.

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Why Taking Out A Debt Consolidation Loan Can Save You Money

When it comes to getting out of debt whether that involves , medical bills, or other credit accounts taking out a personal loan for debt consolidation can be a good option.

A personal loan can allow you to reduce high interest rates , making it easier to knock out your debt for a lower total cost. It also allows you to streamline your debt into one account with one monthly payment, which is easier to manage.

Finding the right personal loan is the first step toward debt consolidation.

If youre ready to apply for a personal loan to consolidate your high-interest debt, visit Credible to quickly and easily compare personal loan rates from various lenders in minutes.

Ask A Friend Or Family Member For Help

What Is the Best Way to Consolidate Credit Card Debt?

Depending on how much money you owe and what your overall financial picture looks like, it may make sense to ask a friend of family member to lend you the money.

But if you opt for this method, its important to be sure the loan terms and repayment plan are clearly outlined, just as they would be if you were getting a loan from a financial institution.

Pros: When you borrow money from somebody you know, you dont have to meet minimum eligibility requirements to qualify for the loan, and you may be able to get a lower interest rate than you would from a bank or credit union.

Cons: Borrowing money from someone you know is tricky because it can put a strain on your relationship. Also, if youre unable to repay the loan on time, you might be putting their finances at risk.

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Your Behavior With Money Doesnt Change

Most of the time, after someone consolidates their debt, the debt grows back. Why? Because they dont have a game plan to stick to a budget and spend less than they make. In other words, they havent established good money habits for staying out of debt and building wealth. Their behavior hasnt changed, so why should they expect their debt status to change too?

Debt consolidation doesnt fix any problems. It just shuffles them around.

The Risks Of Consolidating Your Debt

Consolidating or refinancing loans can work out well if it means paying less in fees and interest. But there are risks:

  • It may be a short-term fix if we cant meet the repayments on the new loan.
  • Lower repayments but over a longer term can add to the overall cost because were paying interest for longer.
  • There can be extra fees and charges, including hidden fees for alterations, late payments and payment defaults. Believe it or not, lenders may even charge extra for paying off existing loans early.
  • Companies specialising in debt consolidation may charge higher interest than a bank. Talk to the bank about what they can offer before signing up with a new company.
  • There would probably have been establishment or documentation fees paid on the original loans. Taking out a debt consolidation loan adds another set of fees, which could cost hundreds of dollars.

To reduce the risks, find out the total cost of consolidating before signing up. Shopping around and reading all the fine print helps.

Borrowing to make ends meet or struggling with debt? Try our debt calculator.

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Why Consolidate Your Debts

How to Consolidate (and OBLITERATE!) Credit Card Debt

Consolidating your debt can save you money. If you have credit card debt that charges 20% or more in interest, consolidating into a new credit card or loan with a lower interest rate will save you money. Do the math for your specific debt to make sure youll save more than any fees youll pay for balance transfers.

It may also simplify your payments. When you have many accounts to manage, you are more likely to make a mistake and miss a payment. Missed and late payments can hurt your credit scores, so consolidating everything into one monthly payment might help protect your credit from a payment mishap.

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Consolidating Credit Card Debt Through A Debt Management Program

If you cant consolidate credit card debt on your owneither because you have a low credit score or too much debt for a DIY solutionthen you need to call in professionals.

  • Contact a nonprofit consumer for a free debt evaluation. The credit counselor will review your debts, credit, and budget to see if you can use do-it-yourself solutions. If not, as long as you have the ability to make monthly payments, you can usually qualify for a DMP.
  • Your credit counselor will help you find a payment that works for your budget. Set up and monthly administration fees will be rolled into this payment. Fees are capped at $79 nationwide and set based on state regulations where you live.
  • Then the credit counseling team calls your creditors to negotiate. They negotiate to reduce or eliminate interest charges and stop penalties that may be getting applied to your debt.
  • Once all your creditors agree to accept payments through the DMP, your plan starts. You make one payment to the credit counseling agency each month. They distribute the money to your creditors as agreed.
  • You still owe your original creditors. The credit counseling agency is basically there to be your advocate and help ensure you can stick with the program.
  • Not sure which consolidation option is right for you? Talk to a certified credit counselor for a free, no-obligation debt evaluation.

    A Real Example Of Credit Consolidation

    Heres an example of how it works when you use a debt management program to consolidate. Lets say you have four credit cards.

    Current Balance

    New average interest rate : 5.73%

    New monthly payment: $303

    Time to pay off total balance: 4 years, 10 months

    Total estimated interest charges: $2,459.65

    In this example, consolidation would:

    • Lower your monthly payments by $324.92
    • Allow you to get out of debt six years and three months sooner
    • Save you $6,453.33 in interest charges

    You still pay back the full balance owed, but you do it in a more efficient way by minimizing interest . Consolidation lowers your monthly payments, the number of payments you need to make to become debt-free, and the total interest charges.

    While balance transfers and debt consolidation work differently, the result is the same. You still minimize interest, combine your debts into one monthly payment, and enjoy the same benefits that you see in the example above.

    If you have questions about debt consolidation or need help finding the best way to consolidate, talk to a certified credit counselor for free.

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    What Other Loan Options Do I Have

    • Home Equity Loans: You can borrow against the sizeable equity of your home to pay off credit card debts. A home equity line of credit comes with lower and fixed interest rates, but your house acts as a collateral.
    • Peer to Peer Lending: Specific groups of online lenders match borrowers with individual investors. Personal loan rates are lower than those in the market. The approval process varies from lender to lender.
    • Loans against 401: Borrowing against retirement funds ) is the Hail Mary you save for last. Once applied, you have to rebuild the investment for the amount you now owe. It is only advisable for people with an extremely poor credit score.
    • Loans from Credit Counsellors: Pay your lenders directly through trusted credit counseling agencies. Leverage their ties with different crediting bodies to get below market interest rates.

    Should I Consolidate My Debt

    Way to Safely Consolidate My Credit Card Debt?

    The answer to this question depends on your circumstances. That said, here are some scenarios where you might be a good candidate:

  • You have a good credit score: If you have a good credit score at least 670 youll have a better chance of securing a lower interest rate than you have on your current debt, which could save you money.
  • You prefer fixed payments: If you prefer for your interest rate, repayment term and monthly payment to be fixed, a debt consolidation loan might be right for you.
  • You want one monthly payment: Also, taking out a debt consolidation loan could be a good idea if you dont like keeping track of multiple payments.
  • You can afford to repay the loan: Finally, a debt consolidation loan will only benefit you if you can afford to repay it. If you cant, youll risk digging yourself in a deeper financial hole.
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    Does Consolidating Debt Hurt My Credit

    Lets face it, if youre looking into a debt consolidation, chances are your credit has already taken more hits than Rocky Balboa. But like Rocky, you can come out a winner. How? Why, with a Debt Consolidation Program, of course!

    A Debt Consolidation Program, when followed and completed successfully, will actually improve your credit in the long-run by properly addressing your debt. Plus, once you’re completely debt-free your counsellor will put you on the fast track to rebuilding your credit.

    Some of the blows delivered to your credit report are likely due to the following 3 factors. Here they areand heres how a Debt Consolidation Program can help.

    Payment History

    Many individuals seeking debt relief have accounts in collections or accounts with missed or late payments. With a Debt Consolidation Program, you only have to make one payment per month to pay all your creditors, making it easier to manage and less likely to be missed.

    This is your available credit versus the credit youve used. To maintain a good score, this figure should be at or below 30 percent however, most people in debt-distress are already over, at, or near their limits. Luckily for you, once you’re on a Debt Consolidation Program you stop using credit , so you automatically stop causing more damage.

    Inquiries

  • 11 Credit Cards in Debt Consolidation?
  • The Benefits Of Consolidating Debt

    Having trouble keeping up with several high-interest loans? It might be worth rolling them into one.

    Debt consolidation loans usually have a lower interest rate and tend to be spread over a longer period so the weekly or monthly payments are smaller.

    Debt consolidation can make budgeting easier because theres only one loan to manage. Well often pay a lower interest rate with a consolidation loan than we would with hire purchase and credit card debt.

    However, debt consolidation wont help if we continue to take on new debt. The key is to focus on getting rid of existing debt rather than adding to it.

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    Why Is It So Hard To Pay Off My Debts

    Letâs say you have a regular credit card, and youâve also taken out a store card to buy a new laptop with 12 months interest-free.

    You decide to concentrate on paying off your credit card, because you have a whole year to worry about the store card, right?

    Flash forward to the 12 month mark. Youâve just had to replace your hot water system and had an expensive dental bill. Your credit cardâs maxed out, and the store cardâs high interest is starting to kick in.

    One repaymentâs due on the 15th of each month, another on the 20th. By the time one comes around, you canât afford the other. Itâs spiralling out of control.

    While these purchases can be justified and were affordable at the time, this is where things get hard to handle. And when debt starts to stress you out, itâs time to take back some control.

    Is It A Good Idea To Consolidate Credit Card Debts

    Credit Card Debt: How to Consolidate it (2019)

    If used correctly, credit card debt consolidation is a good choice for many. Consider two scenarios:

    A)Your credit card payments are due, and interest is accumulating every month. Interest rates are high, and payment timelines are limited. If you have multiple bills like this, then paying the minimum payment amount is only stalling the inevitable. You end up taking more debt to sustain a your lifestyle. At some point, this will all spill over your monthly income. You will become bankrupt.

    B)You take a loan with a much lower interest rate and pay off all credit card bills at once. Now you wont be hounded by multiple creditors for payments. Bringing all payments under one roof brings you back into control and makes the payment process more transparent and reduces the minimum monthly payment as well.

    The result being that you pay less per month, you pay to one creditor, and your credit score stays intact. You may end up paying more in terms of the total interest in the long run, however, consolidating debts gives you time to sort out your financial situation in the meantime. You just need to pay attention to ensure completion.

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    Could Lower Interest Rate

    If your credit score has improved since applying for other loans, you may be able to decrease your overall interest rate by consolidating debtseven if you have mostly low-interest loans. Doing so can save you money over the life of the loan, especially if you dont consolidate with a long loan term. To ensure you get the most competitive rate possible, shop around and focus on lenders that offer a personal loan prequalification process.

    Remember, though, that some types of debt come with higher interest rates than others. For example, credit cards generally have higher rates than student loans. Consolidating multiple debts with a single personal loan can result in a rate that is lower than some of your debts but higher than others. In this case, focus on what youre saving as a whole.

    Second Mortgage Or Heloc

    If your home has appreciated in value over time or the balance has been paid down a fair amount, using your home could be a way to consolidate your debts. Taking out a second mortgage or using a home equity line of credit is effectively using your home as collateral in order to pay off other debts.

    Since there is an underlying asset for these loans, the rate is often lower than what you would get with a personal loan, making either the monthly payments smaller and gaining the ability to pay down the balance quicker. There could additional mortgage-related expenses when taking this route, so a direct inquiry to your lender is a must.

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    Whats A Debt Consolidation Loan

    A debt consolidation loan is a way to bring together all your debits – credit card, student debt, store card etc. – into one so you’ll be making payments in the one place.

    It also means no multiple annual fees, and one regular repayment, with one interest rate.

    Interested to know what it could look like for you? Check out our debt consolidation calculator. Itâs a fantastic tool thatâll show you how much your minimum repayments â and monthly interest â can change.

    Of course, it doesnât mean youâre instantly on easy street â you still have to pay off the loan. But what it does mean is that you can take a breath and take back some control.

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