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(image: https://gogopaydayloans.com/sites/default/files/apply_for_the_same_day_payday_loan_online.jpg)What Is Debt Consolidation, and do I need to consolidate?
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What is Debt Consolidation? and should I consolidate?
Debt consolidation rolls multiple debts into a single payment. It can be a good idea if you qualify for an interest rate at a lower level.
Written by Amrita Jayakumar Writer The Washington Post Amrita Jayakumar is a former special assignments writer for NerdWallet. She also wrote a syndicated column about millennials and money, and wrote about personal loans as well as consumer credit and debt. In the past, she worked as a reporter at The Washington Post. Her work was published within The Miami Herald and USAToday. Amrita has a master's diploma in journalism from University of Missouri. University ofMissouri.
Updated Nov 29, 2022 , 5:12PM PST
Edited by Kathy Hinson Lead Assigning Editor Personal finance, credit scoring, managing money and debt Kathy Hinson leads the Core Personal Finance team at NerdWallet. Previously, she spent 18 years working at The Oregonian in Portland in positions such as copy desk chief and team leader for design and editing. Her previous experience includes news and copy editing for various Southern California newspapers, including the Los Angeles Times. She received a bachelor's degree in mass communications and journalism in Iowa's University of Iowa.
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Debt consolidation combines several debts, usually high-interest debt such as credit card debt and other debts, into one payment. Debt consolidation might be an ideal option for you if you can find a lower rate of interest. This will allow you to reduce the total amount of debt and help you organize it so you are able to pay it off faster.
If you're facing an amount that is manageable and want to organize multiple bills with different interest rates, payments and due dates Debt consolidation is a viable option you can tackle by yourself.
The most important takeaways
How to consolidate your debt
There are two ways to consolidate debt, each of which consolidates your debt payments in one bill per month.
Take a : Convert all your debts onto this card and then pay the balance in full within the promotional period. You'll likely require good or excellent credit (690 or more) to be eligible.
Take advantage of a fixed-rate loan borrower: Use the proceeds of the loan to pay off your debt, then pay back your loan by installments throughout the course of a specified time. You are eligible for an loan even if you have poor or average credit (689 or lower), but borrowers with higher scores will likely qualify for the lowest rates.
Another option to consolidate debt include using a credit card or . But both options come with risks to your home or retirement. In any case, the best option for you will depend the credit scores and profile, along with your .
>> MORE:
Debt consolidation calculator
Use the calculator to figure out whether or not it's a good idea to consolidate.
Debt consolidation can be an intelligent choice
Success with a consolidation strategy is dependent on the following factors:
Your monthly debt payment (including your rent or mortgage) do not exceed 50% of your monthly gross income.
Your credit score is high enough to get you credit cards that have a low interest rate or low-interest consolidation loan.
Your cash flow is always sufficient to cover payments toward your credit card.
If you opt for the consolidation loan, you can pay it back in just five years.
This is a scenario where consolidation is logical: Let's say there are four credit card accounts with rates of interest ranging between 18.99 percent to 24.99%. You always make your payments on time, so your credit is good. You could be eligible for an unsecured debt consolidation loan at 7% -which is a significant reduction in interest rate.
For many, consolidating offers a way to see the other end. If you're taking the loan with a three-year term then you are certain that it will be paid off in three years -- assuming you make your payments punctually and are careful with your spending. Conversely, making minimum payments on credit cards could lead to some time before they're paid off in addition to accruing more interest than the initial principal.
Readers also ask
It is it an ideal option to combine credit cards?
Consolidate your debts if it means you are able to obtain an loan with better terms, or it helps you keep your payments on track. Make sure that this consolidation is part of a wider plan to reduce the debt and to avoid running into new debts with the credit cards you've consolidated. Find out more about .
How does an debt consolidating loan work?
A personal loan lets you pay your debts yourself or use the services of a lender who will pay directly at your creditor. Find out the steps to .
Do debt consolidation loans hurt your credit?
Debt consolidation can help your credit score when you pay on time or consolidating the credit card balances. Credit can be damaged when you accumulate the balance on your credit card shut down all or the majority of your cards or fail to pay you debt consolidation loan. Find out more about .
When debt consolidation isn't worth it
Consolidation isn't a silver bullet for debt problems. It doesn't address excessive spending habits that create debt in the first place. Also, it's not the best solution if you're and have no hope of paying it off by making smaller monthly payments.
If your debt load is not too high, and you could pay it off within six months or a year at your current pace -- and you'd only save an amount of money when you consolidate, don't bother.
Try a do-it-yourself debt payoff option instead, such as the . You can utilize a tool to test out the different strategies.
If the total of your debts is greater than half your income, and the above calculator reveals that debt consolidation isn't your best option, you're better off treading water.
>> >> MORE: Sign-up with NerdWallet to view your debt breakdown and the next installments all in one place.
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About the author: Amrita Jayakumar is a former writer for NerdWallet. She was previously employed by The Washington Post and the Miami Herald.
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