8 Things You Should Know About Debt Consolidation
Debt consolidation can be a great way to get a handle on your finances, but there are some things you should know before you decide if it's the right solution for you. Here are eight important things to consider.
Credit Scores
Consolidating your debts also has the potential to impact your credit score, but it's different depending on whether you do a balance transfer or personal loan. It might be possible that doing one over the other will help you save more money in total because of how they affect your credit score. A piece of wisdom from joywallet is that a balance transfer can help increase your credit score, but it can also increase the debt you owe if you're not careful. And because a personal loan will stay on your credit report longer compared to a balance transfer, it might be another route that could give you better results in this area.
Also, if you're planning on doing a balance transfer, there are things to look out for — like making sure to pay off the transferred debts and avoiding new purchases and cash advances so your credit score won't be impacted.
Interest Rates
The interest rate is one of the most important considerations when deciding how long to keep debt consolidation loans in place and whether they're worth pursuing at all. If interest rates will remain low or increase slowly over time, then consolidating debts might make sense because it reduces monthly payments and saves money on high-interest credit card balances due to lower interest rates than those cards provide. But if rates go up quickly after committing, paying off what's owed would become more expensive than just continuing with higher monthly payments.
Where to Get
There are many options for consolidating debts — and what's important is how much work you're willing to put in and how much you want to spend. You can go through a debt settlement company or bank, but this might mean paying fees and settling for less than the debt owed if they take too long. Or you can work with a credit counseling organization that offers services such as debt management plans (DMPs), which could save you a lot of money by offering agreements with creditors for lower interest rates and fees.
Paying Fees
You might be required to pay a monthly fee as well as closing costs that could cost more than the debt relief itself. Or there's individual negotiation that allows you to work directly with your lenders, which will take more time but let you keep any extra funds from lowering what's owed or negotiating fees.
Turning to friends or family members with good credit is another option if you're trying to consolidate debt, but doing this might not always be possible for everyone. And it could put relationships in jeopardy if the parties involved decide to go their separate ways before settling debts. Be sure you know all your options when choosing between consolidation methods.
Professional Help
Working with a professional can help you come up with the best debt consolidation option that works for your current situation. They might also be able to negotiate better deals on interest rates or fees, or they could find new ways to reduce what's owed if other options aren't working. And knowing how consolidation affects cash flow and your monthly expenses is helpful when deciding which direction to go.
A professional can also help you get organized and stay that way when it comes to paying back what's owed. They can provide education on spending habits and financial planning, which can be helpful in the future.
Prevention is Better Than the Cure
Sticking with the basics is usually a good idea (like paying bills on time consistently, having some money put away in savings, or a rainy day fund), but if you're already in debt, these tips might not be enough to get back on track. A good rule of thumb is that you should try to pay as much as you can each month toward your debts until they're all paid off. It's also always better to avoid accumulating more debt than necessary — and instead, look for new ways to make extra money as a means of paying off debts without incurring more.
On the other hand, if you're trying to get out of debt and know it will be a lengthy process, you might want to consider some type of debt relief — like using balance transfers or personal loans.
Eligibility of These
Both balance transfers and personal loans can be great debt consolidation options depending on whether you're eligible for each. Balance transfers might be a better option if you're able to qualify because of the possibility of increased credit. Personal loans, on the other hand, can help you get out of debt faster and more efficiently if the lender offers lower interest rates.
For example, if you're looking to consolidate debt with a balance transfer, you might want to check into cards that offer no interest for an introductory period — which can save you up to 18 months. This will give you time to pay off what's owed without accumulating more interest.
Scams and Pitfalls
If your debt is very high, it might take several years to successfully repay what's owed. This means that in the meantime, you'll find yourself falling even more behind on bills and accumulating more interest. When that happens, you could be worse off than when you started — and end up in a worse financial situation than before. If your credit isn't the best, debt consolidation can put even more strain on what you owe and how much is owed.
Another pitfall to watch out for is predatory lenders. They take advantage of people looking for debt relief or offer consolidation services that sound too good to be true. If you decide to go with a debt relief company, make sure you do your research first and ask about their reputation before signing up.
Doing the research may turn out to be invaluable, especially if something goes wrong after the debt consolidation process begins.
Debt consolidation can be a great way to get a handle on your finances, but these are some things you should know before you decide if it's the right solution for you. Therefore, if you're looking to consolidate debt, consider the above factors first, and remember to do your research and choose smart.
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