If you have many sources of debt and are struggling to keep up with your payments, or if you simply want to re-organize multiple bills, consider debt consolidation.
Debt consolidation essentially converts multiple debts or bills into one single payment with a single due date – and often at a lower interest rate. This helps to streamline your financial situation so you can better manage your debt. In many cases, debt consolidation will allow you to pay off your debt faster.
How do I consolidate my debts?
Generally speaking, there are two main ways to consolidate your debt. They both roll your debts into one monthly bill, but are slightly different in their approach.
If you have good credit:
Obtain a balance-transfer credit card with 0% interest. You can then transfer all your debts to this card and pay the balance in full during the promotional period. Remember, this will likely require you to have good credit (690+).
If you have fair credit:
Apply for a fixed-rate debt consolidation loan. You can use the money from the loan to pay off your debts right away, then pay back the loan in installments over a set term. While you can qualify for this type of loan if you have bad or fair credit (689 or below), you’ll get a lower interest rate if your score is higher.
You could also take out a home equity loan to consolidate your debt, but that involves some degree of risk. Your best option will ultimately depend on your credit score and financial situation – particularly your debt-to-income ratio,
When should I consolidate my debts?
As a general rule, debt consolidation will succeed under the following circumstances:
- Your total debt is less than 40% of your gross income – don’t count mortgages.
- You have good credit and can qualify for a 0% credit card or low-interest debt consolidation loan.
- Your cash flow can consistently cover your debt payments.
- You have a sound plan to prevent going into debt again.
For example, let’s say you have several credit cards with high interest rates (19-25%). You’re able to make your payments on time, and you have a good credit score. You might be able to qualify for an unsecured debt consolidation loan at a lower interest rate – say around 7%. In this case, debt consolidation makes sense, and would be a wise choice.
In many cases, people opt for debt consolidation as a way to get peace of mind. They can see how the process is simplified and can get a clear picture of how and when their debt will be paid off. If they are able to manage their spending and make payments on time, they will successfully tackle their debt.
In some cases, debt consolidation can backfire and turn into an excuse to accrue more debt. This is a situation you want to avoid!
When is debt consolidation NOT worth it?
Remember that debt consolidation isn’t a magic solution for all your debt problems. It doesn’t actually address the issues that got you into that situation in the first place, such as spending habits.
It’s obviously not the right solution for you if you’re overwhelmed by debt and can’t hope to pay it off even at a lower interest rate. If all your debts combined add up to more than half your income, you should look into debt relief rather than debt consolidation.
If your debt is relatively small, and you can manage paying it off quickly (within six months to a year) then you’d likely only save a small amount by consolidating your debt. That might not be worth it. You’d be better off paying it down yourself.
If you’re looking to simplify your financial situation and focus on one monthly payment, consider debt consolidation – especially if you have a good credit score. Contact Loans SOS and find out how we can help.