Debt Consolidation Made Simple
Debt consolidation is the merging of several unsecured debts, medical bills, credit cards, payday loans, personal loans, etc., into one single debt before paying it off as a single loan. Instead of having to write multiple checks to different creditors every month, the debts are consolidated into one payment that is paid off using a single check. This helps by eliminating mistakes that usually result in penalties like late payments or incorrect amount.
There are three major debt consolidation types available, and they include Debt Settlement, Debt Consolidation Loans, and Debt Management Plans. It is important to note that these loans aren’t quick fixes, but long-term financial strategies that are designed to help people get out of debt. When done the right way, debt consolidation can:
1. Lower one’s monthly payments
2. Lower one’s interest rates
3. Help one get out of debt much faster
4. Protect one’s credit score
What’s Bill Consolidation?
Bill consolidation is a debt consolidation option that’s designed to eliminate debt by merging bills and paying them off as one. With this option, you only make a single monthly payment, which is a good thing, especially if you have a couple of separate bills (phone services, credit cards, etc.) you need to make payments for every month. When you consolidate all your bills into one single bill, then the single payment will have a lower interest rate and reduced monthly payments. You could use the money saved to start an emergency fund, which can come in handy in future.
Getting a Consolidation Loan
Credit unions and banks are a good place to ask about consolidation loans. At the same time, online lending sites are also a great place to borrow. The important thing, however, is knowing how to consolidate all your bills. Start off by listing all the debts that you want to consolidate, medical bills, phone, utilities, credit cards, etc., and the monthly interest rates and payments you make on each of them. Furthermore, it helps to know your credit score standing.
Once you have gathered all the necessary information, compare different lender’s fees, rates and the length of time each will require you to make payments before making any decision. With a consolidation loan, you should be able to enjoy reduced interest rates and lowered monthly payments. At the same time, this option offers a more practical and effective way of eliminating your debt.
How to Consolidate Your Credit Card Debt On Your Own
If your credit score is good (700 and above), then the best way to consolidate your credit card debt is by applying for a 0% interest balance transfer card. The 0% interest is basically an introductory rate that normally lasts for six to eighteen months. All the payments made during this time go towards reducing your debt balance. When the 0% introductory rate comes to an end, the interest rate then jumps to anywhere between 13% and 27% on the balance that remains. However, it is important to note that some balance transfer cards tend to charge an extra transfer fee (about 3%), with others even charging annual fees.
Another way to go about consolidating your credit card debt is to opt to stop using your cards and paying for things using cash instead. Doing this will give you space to set aside a portion of your monthly income to pay off card balances, one at a time. Once you have paid off all your cards, choose one and come up with a plan on how to use it responsibly.
How To Consolidate Your Bills
Bill and debt consolidation requires persistence, patience, and some organizational skills. Start by gathering your bills for things like utilities, credit cards, cell phones and medical amongst other things and summing them up. Add the total owed to your unsecured debt. Once you have done this, determine how much you can pay off comfortably on a monthly basis while still having enough money to pay for basics like transportation, food, and rent.
Once you have the number, decide on which option between a debt management program, debt settlement, or personal loan will offer you the best chance to eliminate your debt. It is important to note that this process usually takes between 3 to 5 years. There aren’t any easy fixes when it comes to debt consolidation.
When Not To Go For Debt Consolidation
Debt consolidation is one of the best ways of simplifying your bill payment process, however, depending on the approach you choose, be it the secured personal loan, debt settlement, or balance transfer on a credit card approach, there are reasons why this option may not be a good one for some people.
If for instance, you opt to pay off your credit card debt by opting for a 0% interest balance transfer to a new credit card but continue to use the new 0% interest rate credit card the same way you did the old one, then you enter into even more debt.
If you go for debt settlement, then it is important to note that your credit score will suffer a severe blow, a hit that could last up to seven years; making it very hard for you to get loans for a home or car during that period. At the same time, this could lead to the spiking of interest rates for any new credit cards you obtain. However, of all options available, using a secured loan as a means to consolidate your bills could be riskiest. While putting your car or home up as security could offer you better interest rates, any missed payments could leave you in danger of losing the home or car.
For debt consolidation to be effective, it is imperative that you calculate the number of payments you will be required to make and the amount of interest that will be included in this payment. This is important if your main aim is to reduce, and eventually, eliminate the debt. At the same time, doing this will help you determine if the money and time involved are lesser than doing things the way you have been so far. Honestly, it is not going to be easy. However, if you aren’t committed to changing the habits that got you into the financial rut you are in, then your efforts to consolidate your debt could end up worsening things for you.