27
Oct-21
What Is Debt Consolidation?
Debt consolidation is a sensible financial strategy for consumers tackling credit card debt and other debts. It merges multiple bills into a single debt that is paid off with a debt management plan or a consolidation loan.
Debt consolidation reduces the interest rate on your debt and lowers monthly payments. This debt-relief option untangles the mess consumers face every month trying to keep up with multiple bills and multiple deadlines from multiple card companies.
In its place is a simple remedy: one payment to one source, once a month.
Debt Consolidation Requirements
Any form of consolidation requires you to make monthly payments, which means that you have a steady source of income.
If you are looking at a debt consolidation loan, the second requirement is that you be creditworthy. Lenders regard your credit score as the most obvious sign of your creditworthiness. If your score is above 740, you’re definitely good to go. If it’s between 670-739, you probably qualify, but may pay a higher interest rate. It’s possible you qualify with a score below 670, but the result is a bad credit consolidation loan, with an interest rate so high that this is not a good option.
If you choose debt management as your consolidation program, there is no loan involved and credit score is not a factor.
How to Consolidate Debt
Add up Your Debt
The first step in consolidating your debt is to figure out how much you owe. This will help you determine how much to borrow – if you choose to consolidate with a loan.
Calculate Your Average Interest Rate
Each credit card will have a different interest rate with a different balance, so the number you really are looking for is the weighted average interest rate. Find an online calculator and let it do the math for you. Your average credit card interest rate will give the lender a number to beat.
Determine an Affordable Monthly Payment
Next, look at your monthly budget and spending on necessities like food, housing, utilities and transportation. After paying those bills, is there money left that can be used to pay off credit cards? Your monthly consolidation payment must fit your budget.
Weigh Your Consolidation Options
This will require a little research as there are a few options to choose from:
- Debt consolidation loan
- Debt management plan
- Debt settlement
- Credit card balance transfer
- Home equity
- Retirement accounts
Each method is designed for a different situation, so be sure to check the eligibility and requirements as well as the pros and cons of each. There is a cost to each type of consolidation such as interest (loans), monthly fees (debt management) or taxes and fees (debt settlement).
source: https://www.debt.org/consolidation/