DebtQuote

Debt consolidation is a debt management process that involves combining multiple debts into a single payment. Using this strategy you are able to simplify your payment schedule and get a lower interest rate. It makes the repayment method easier because instead of paying, for example, $5,000 in credit card debt spread over many different cards, you make a single monthly payment, without worrying about organizing your bills and paying each one on time.

Pros

One predictable payment a month Flexible terms No credit impact

Cons

Good credit requirement No reduction on principal Results vary

Certain debt consolidation methods could even help you save on interest, since the average interest rates on credit cards range between 13%-23%. When considering debt consolidation, there are a number of different strategies you should consider.

Is Credit Card Debt Consolidation Right for You?

Credit card debt consolidation can be a great way of securing a lower interest rate than the average rate of the existing debts, this means that more of your money goes toward canceling your debts. You should consider credit card debt consolidation if:

You have a good credit score.
You are sure you won't rack up your balances again.
You haven't made a significant dent in your credit card debt.
Your credit card interest rates are high.

There are other solutions that could make more sense if:

Your credit score is low.
You're going to divorce, job loss or an illness.
You have a high debt-to-income ratio.
Your need to get your spending habits under control.

If you can't qualify or afford debt consolidation, credit card debt relief may be a better option. Credit card debt relief refers to settling with your credit card companies for less than what you owe. It is different from debt consolidation because debt consolidation does not reduce your balances. Keep in mind that no creditor is required to settle a debt, but many are willing to work with you to come to an agreement.

How To Consolidate A Debt

You consolidate debt by combining multiple debts into one single, more manageable, monthly payment. There are different methods for debt consolidation, depending on which of these three popular ways to consolidate debt you choose, that payment could be to a lender, another credit card company, or a debt relief program.

1

Balance Transfer Cards

Credit card companies are well aware that the average U.S. household owes $15,654 just in credit card debt, so they devised a debt management solution called a balance transfer card. A balance transfer card is a high-limit credit card that allows you to transfer the existing balances from one or more credit cards onto a single line of credit and gives you a chance to pay it off at a low rate for a specific period of time. Some balance transfer cards offer a lower or 0% introductory interest rate on the transferred balance for a set amount of time, typically 12 months or more. It's easy to be tempted by this offer when you are carrying multiple balances on cards that have high interest, but it might not be a great deal in the long run.

Many Balance Transfer Cards Charge A Fee For Every New Debt That You Transfer Over To The Card.

Be aware that many balance transfer cards come with fees associated with moving the debt onto the new card. These fees are typically a percentage of the transferred amount, between 3% and 5%. If you were to transfer a credit card debt of $1,000, you would end up paying $30-$50 in fees just to get the balance transferred over. That may not seem like a lot for one single debt, but imagine how much you'd end up paying in transfer fees for a debt over $10,000. And once the promotional period ends on your balance transfer card, your rate is subject to change. To make it less enticing, many balance transfer cards have the same interest rate as any other cards after the promotional period expires. So you have to pay off the debt during the promotional period or you'll end up with almost the same amount of debt at the same rate that you had before transferring your balance over.

When To Use A Balance Transfer Card For Debt Consolidation

Balance transfer cards may be a good idea if you have several different debts with high interest rates and can pay off all of your existing credit card debt within the promotional period. But if you have a lot of credit card debt and can't afford to pay it all off in the set specific time the balance transfer credit card gives you the promotional 0% APR, it might not be the right consolidation solution for you. You don't want to land in the same financial situation that you were stuck in before.

2

Debt Consolidation Loans

Personal debt consolidation loans are another way to consolidate debt. Personal loans are very popular nowadays because you can use them for almost anything, such as paying major expenses like a wedding or vacation. But personal loans are commonly used as a method for debt consolidation. Merging all of your unsecured debts into a consolidation loan is a great way to simplify your payments and pay off your debt at a lower rate. The terms on debt consolidation loans usually range from 24 to 72 months, which could help you get out of debt in the time that it takes to make minimum payments. Debt consolidation loans are usually fixed-rate loans, which typically range from 10% to 32%, depending on your credit profile, debt-to-income ratio, and other factors. These rates won't usually go up unless you miss payments. Unlike balance transfer credit cards, there is no fee for rolling all your debt into a debt consolidation loan. Some consolidation loans do require you to pay an origination fee, which can range from 1%-6% of the total loan, but certain providers waive this fee. There are two common methods to take out a consolidation loan: you could find a loan provider online or go to your bank or credit union. Different lenders provide different rates, so it's a good idea to compare rates and find the best deal before signing a contract for a debt consolidation loan.

When to Use a Debt Consolidation Loan

Using a debt consolidation loan can be a strategic financial move to simplify your payment schedule and lower your interest rate, but you may pay more each month to get out of debt. Imagine you have a $15,000 debt in your credit card and you're making minimum payments with 16.99% APR, it could take you 258 months to pay it off and cost you approximately $450 every month. With a debt consolidation loan with a rate of 13% APR, you could be debt-free in 36 months, but it would cost you $505 every month.

A consolidation loan could help you simplify your payment schedule and lower your interest rate, but you may have to pay more each month to cancel your debt faster.

A debt consolidation loan could be the right financial move if you can get a lower rate than you are currently paying on your credit card debt and you can afford to make our new monthly payments. Unfortunately, not everyone can get a good rate on a debt consolidation loan, for example some people who are struggling with heavy credit card debt may have a low credit score and their debt-to-income ratio (DTI) is too high.

3

Cash-Out Refinance

This option is available for homeowners who need to consolidate debt to pay off their existing credit card debt at a lower rate and have more time to pay it off. You can consolidate your debt by refinancing our home loan and taking out more money than you owe on your mortgage. You then continue to pay your mortgage like usual, with your unsecured debt rolled into it. A cash-out refinance is a type of mortgage with a term of 5, 15, or30 years. A cash-out refinance could provide you a significantly lower interest rate than the pay you're trying to pay off, since the average 30-year fixed mortgage rate in 2017 was 3.99%. It might seem like an easy choice, but there are some risks involved. If you are unable to pay, your home could be foreclosed or repossessed, since your mortgage is attached to it and is therefore considered a secured debt. That's why it is so important to make sure that you can afford your payments if you decide to resort to this debt consolidation method. Remember that a cash-out refinance is a mortgage, which means that you may have to pay all of the fees associated with a mortgage when you decide to consolidate with a cash-out refinance. Be prepared to pay expenses like home appraisal, origination costs, and closing costs.

When To Use A Cash-Out Refinance To Consolidate Debt

If you own a home, have a lot of high interest credit card debt, and can afford the fees and your new monthly mortgage payment, then using a cash-out refinance to consolidate debt would make sense. Just like with a debt consolidation loan, part of your new mortgage rate is determined by your credit score and debt-to-income ratio. You may have trouble qualifying for a worthwhile interest rate if you have a low credit score or your debt-to-income ratio is too high.

Debt Consolidation Vs Credit Card Debt Relief

Debt consolidation and credit card debt relief are sometimes presented as the same type of debt management tactic, but they are very different. One could be better than the other depending on your specific financial situation. Here are some factors to consider before thinking about debt consolidation.

Are You Eligible For Debt Consolidation?

There are limits on how much you can borrow with debt consolidation loans, balance transfer cards, and cash-out refinancing. Loan amount for balance transfer cards and debt consolidation loans could range from $1,000 to $50,000. You need to have equity in your home that you can borrow against to qualify for a cash-out refinance. Without equity in your home, you may only be able to borrow up to 97% against your home's current value. Even being eligible for debt consolidation does not ensure you'll qualify for a favorable rate that is less than your current debts. Many companies that offer debt consolidation may advertise low rates, but they can't offer you those rates unless you have an excellent FICO score and a low debt-to-income ratio. You need an excellent credit score to even qualify for a balance transfer credit card. And it's hard to find a low rate for a cash-out refinance without excellent credit.

Can You Afford Debt Consolidation?

While it may be true that debt consolidation methods allow you to pay off your debt faster, they could also cost you a lot more each month than a debt relief program coud.

Debt consolidation loans extend the time period you have to pay off your debt to 24 to 72 months, so you could end up paying more each month for consolidation $5,000 or more in debt.
Balance transfer credit cards are only helpful if you can pay off your debt before the low APR promotional period expires. And to make it possible to pay your debt in the 12 month promotional period, your monthly payments could be skyhigh.
Cash-out refinancing may seem like a better option out of the three, but you're still adding to the amount you pay each month for your mortgage and you'll pay thousands in interest if you spread your mortgage over a 15 or 30 year term.

Debt Consolidation: The Main Point

Debt consolidation is a good option if:

You owe an amount between $1,000 and $50,000.
You can afford to pay off your debt during the promotional term of your balance transfer card or the term of your debt consolidation loan.
You have excellent credit and can get a low rate.

Even if you qualify for debt consolidation, keep in mind that debt consolidation loans, balance transfer cards, and cash-out refinancing are still a type of debt that you have to pay. If you simply combine your personal loan, medical, or credit card debt into a single account and keep up with your spending habits, you could end up in the same situation or worse, with even more debt than before. We here at Debt Relief are happy to help provide answers for you. Give us a call at 888-889-4622 now or book a free debt evaluation form a certified Debt Consultant online. Our team is happy to discuss different options for dealing with your debt with you. In our first phone call, we´ll help you decide which debt solution best fits your needs. There´s no obligation to sign up for our debt relief program, and you won't be pressured to make a decision you aren't ready to make. We want to help you find the debt solution that's best for you, even if it turns out that our debt relief program isn't right for your situation.