What is Debt Consolidation?

Worrying about credit card debt

Debt consolidation is the process of transferring high-interest debts to a combined payment system with lower interest. This is effective for credit cards, car payments, medical bills, etc.

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Is Debt Consolidation Right for Me?
Debt Consolidation vs Debt Settlement
The Hard Truth About Debt
Refinancing – Alternative to Debt Consolidation
Consolidating Your Debts into One Card. Is it Wise?

Is Debt Consolidation Right for Me?

Debt consolidation is a specific type of “debt refinancing” that lets a person pay off debts that they owe. For many, it is an ideal way to take the pressure of owing money off one’s shoulders. The burden of debt, if you will. This form of debt relief rolls all of your unsecured debts (i.e. credit card balances, personal loans, utility bills, medical bills, etc.) into one bill. It helps the person avoid having to juggle paying off multiple bills with multiple due dates. It also condenses and organizes all of your debt into a singular form of a monthly payment.

There are a lot of paths to go down when it comes to consolidating debt. One direction includes transferring their debt to a low-interest credit card, a zero interest credit card, getting a debt consolidation loan, or even applying for a refinance loan, or paying back your debt through a debt repayment consolidation plan. There are many options to consolidate your debt, so choose the best one that fits your needs.

Debt Consolidation vs Debt Settlement

debt consolidation and debt settlement on scale

There’s a big difference between debt settlement and debt consolidation, even though the terms are often confused with one another.

Connecting with a credit counselor and doing your deep research, regarding the difference between debt settlement and debt consolidation, will generally be your best route.

Paying your debt, either through debt consolidation or debt settlement, is first and foremost the most important aspect of this process. If you do not pay towards it, after negotiating the settlement or consolidation, it can severely hurt your score. This is a pattern that many people in the United States, unfortunately follow. What they end up doing is settling their debt through either avenue, and then not paying towards it. They use the extra money to go on vacations or other such extravagant ways. This is not how it should be done, debt settlement or debt consolidation.

Always make sure to apply everything you have towards the respective debt. It is not the best of ideas to elongate the process and end up paying the debt off for a long period of time. Make sure you maintain the time to pay off the debt in 2-4 years.

Lastly, what you would want to do is pay close attention to the disclaimers and small print that is found at the end of the contract. There are transfer fees that may not be disclosed to you right up front, and hidden within the contract.

The Hard Truth About Debt

Past due bill

There are many different types of debt that individuals can incur. Unfortunately, debt that is left unpaid for lengthy periods of time can be extremely hard to pay off since there are usually multiple payments to be made with high interest rates adding to the pile.

Credit card debt and student loans are the biggest culprits after mortgage debt. They are a thorn in the side of the family trying to live a normal life. Imagine every month, having to juggle multiple payments and never getting anywhere!

The bottom line is, if you feel underwater with the debt you have, whether it’s a combination of car loans, student, credit card and other unsecured debt…then it is probably time to consider working with a company that can assist you in getting out of it.

Refinancing – Alternative to Debt Consolidation

Box full of coins with sign

If for whatever reason, you have enough equity in your home with an interest rate that would benefit you; this then would make perfect sense to refinance. In essence, you

would take any cash from this process and use it towards your unsecured debt.

Refinancing Pros

  • You can save a by combining debts of typical credit card bills to the lower rates of home equity loans and refinances.
  • You will be able to deduct the interest on home loans, which you cannot do with credit card lenders
  • If you research carefully, you will be able to get a great deal on closing costs, which could eventually save you money

Refinancing Cons

  • You put the risk of your home on the line, which is not always a good thing, unless you are certain you can trust yourself to not overspend and to pay off the home loan on time. In this day of age, it is sometimes hard to accomplish this.
  • Variable-rate loans can carry baggage with it. The rate that goes down, may go up as well, increasing the cost that you originally borrowed.
  • Do not extend the length of time you will be in debt, or it may cost you more in the long term.

Refinancing Tips

  • Do not spend the money that you are refinancing. The recommend route to down is to create an emergency savings fund. Use that money as prepayment against your home loan or to boost your retirement savings.
  • Any tax refunds that come, you can utilize towards this.

Consolidating Your Debts into One Card. Is it Wise?

Woman holding credit card

One way to combine your credit card debts is to connect with a single card company and ask for a low rate, then transfer all the debt over to that respective card. There are promotions out there for 0% but take heed. After a certain period of time, the 0% goes away and you are stuck with paying extra fees, fines and now a larger percentage.

Ask about these three options while you have the card company on the phone (whether it is a company that you currently deal with or a newer one).

  1. Obtaining a certain rate on new balances that you would then transfer to their card.
  2. Getting rates lowered on new purchases
  3. Any annual fees or other out of the ordinary fees reduces or even waived.

Every little bit adds up when it comes to relieving debt.

Debt Consolidation Pros

  • Getting on the phone is easy. It’s just a matter of who you talk to and if they are willing to move forward with it. Sometimes you have to wait hours for a supervisor.
  • You have nothing to lose

Debt Consolidation Cons

  • If you have a fluctuating payment record, it may not work, or you may not get approved.
  • Try to get a new lower rate credit card. Even though this is quite the hassle than making one call, you would be honest about your credit situation. You may find a very low rate that you would be happy with. Again, it’s not as easy as it sounds, especially with credit card companies.

Debt Consolidation Tips

  • Ask for any balance transfer fees to be waived.
  • Do not apply for too many new cards at one time. It may hurt your credit score.
  • While you can save the most by transferring your debt to another low (introductory) rate card whenever the last “teaser” rate is about to expire, the constant balance transferring can eventually ruin you out. Try to find a low-interest credit card and consolidate with a lender that you can trust and is there to work with you, not against you.
  • Make sure to take your savings and apply it towards your debt.
  • Check out our reviews of debt relief companies to get an idea of which companies you can trust to handle your debt consolidation.
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