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What is Debt Consolidation? and should I consolidate?
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What is Debt Consolidation? and do I need to consolidate?
Debt consolidation rolls multiple debts into a single payment. It is a great idea if you qualify for an interest rate that is low enough.
The article was written by Amrita Jayakumar Writer The Washington Post Amrita Jayakumar is a former special assignments reporter for NerdWallet. She also published a syndicated article on the millennial generation and money. She also wrote about personal loans as well as consumer credit as well as debt. Previously, she was an editor at The Washington Post. Her work has been featured within the Miami Herald and USAToday. Amrita holds a master's degree in journalistic studies from the University ofMissouri.
Updated Nov 29th, 2022 at 5:12PM PST
Written 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 at The Oregonian in Portland in capacities such as chief of the copy desk and team director of design and editing. Prior experience includes news and copy editing at various Southern California newspapers, including the Los Angeles Times. She graduated with a bachelor's in mass communication and journalism from Iowa's University of Iowa.
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Debt consolidation rolls multiple debts, typically high-interest debts, such as credit card bills and other debts, into one payment. Debt consolidation might be the best option for you if you are able to obtain a lower interest rate. That will help you reduce your total debt and reorganize it so you can pay it off more quickly.
If you're struggling with an amount that is manageable and want to organize multiple bills with various interest rates, repayments and due dates, debt consolidation is a viable option that you can do on your own.
Important takeaways
How do you consolidate debt
There are two primary methods to consolidate debt, both of which concentrate your debt repayments into one monthly bill.
You can transfer all your debts onto this card and pay the balance in full during your promotional duration. You will likely need excellent or good credit (690 or higher) to be eligible.
Get a fixed-rate borrower: Use the proceeds of the loan to pay off the debt, and then pay back the loan by installments throughout the course of a specified time. You are eligible for an loan if you have bad or good credit (689 or below) however, those who have higher scores are likely to qualify for the lowest rates.
Two other options to consolidate debt is taking out a or . However, both of these options involve the risk of losing your home or your retirement. Whatever you decide the most suitable option for you will depend upon your credit rating and profile, along with your personal situation .
>> MORE:
Debt consolidation calculator
Utilize the calculator to figure out whether or not it's a good idea to consolidate.
If debt consolidation is an intelligent choice
The success of a consolidation strategy is dependent on the following:
Your monthly debt payments (including your mortgage or rent) aren't more than 50 percent of your monthly gross income.
Your credit score is high enough to qualify for a credit card with a 0% interest period or a low-interest debt consolidation loan.
Your cash flow consistently covers the cost of your credit card.
If you decide to take to take out a consolidation loan and you decide to repay it, you can pay it back in just five years.
This is a scenario where consolidation makes sense: Say you have four credit card accounts with rates of interest ranging from 18.99 percent to 24.99 percent. You always make your payments on time, so your credit score is excellent. You might qualify for an unsecured debt consolidation loan at 7% -an incredibly low interest rate.
For many, consolidating reveals a light at an end. If you choose to take out the loan with a term of three years you can be sure that the loan will be paid off within three years, assuming you make your payments on time and manage your spending. In contrast, the minimum payment on credit cards can mean months or years before they're paid off and you'll be paying more interest than the original principal.
Readers can also ask questions.
Do you think it's an excellent suggestion to merge credit cards?
Consolidate your debts if it means you are able to get a loan with better terms, or it can help you to pay your bills on time. Be sure to ensure that the consolidation is part of a wider plan to get out of debt , and that you don't rack up new balances on the cards that you've consolidated. Find out more about .
What is an debt consolidating loan work?
A personal loan lets you pay off your creditors yourself, or you can use an lender who sends cash directly towards your debtors. 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 shrinks the balances on your credit cards. Your credit could be affected in the event that you rack up debt on your credit cards shut down all or the majority of your remaining cards, or miss a payment on the loan for debt consolidation loan. Learn more about .
When debt consolidation doesn't make sense it, then don't do it.
Consolidation isn't a silver bullet for debt problems. It's not a solution to the excessive spending habits that create debt in the beginning. Also, it's not the best solution when you're not in any chances of paying it off even by making smaller payment.
If your debt load isn't too heavy, you could be able to pay it off in six months to a year at your current pace and you'd only save the amount you'd save in the process of consolidating, you shouldn't be concerned.
Do-it-yourself debt repayment alternative, like the . You can use a to test out the various options.
If the sum of your debts is greater than half your income and the calculator above reveals that debt consolidation isn't your best option, you're better off than treading in the water.
>> MORE: Sign up with NerdWallet to see your current debt breakdown and the next installments all in one spot.
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>> LEARN about: What Canadians ought to think about
About the author: Amrita Jayakumar is a former writer at NerdWallet. She has previously worked for The Washington Post and the Miami Herald.
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