What is Debt Consolidation?

How Can Credit Card Consolidation Work For You?

Credit consolidation services allow you to borrow money to pay off your existing debts. After the previous debts are repaid, you will need to pay off your new debt to the service. Going forward, you may save money on this debt rearrangement.

Ideally, the new loan should have more favorable terms compared to the existing ones. It can be a smart solution to reduce your interest and lower your monthly payments. Potentially, you can contribute more money to your minimum payments and become debt-free sooner.

For example, you may have two credit cards with balances of $6,000 and $3,500 with the same annual percentage rate at, let’s say, 25%. If you consolidate them at a lower interest rate, you will essentially create one debt of $9,500 – but the best part is that you can significantly reduce your interest rate.

How Do Credit Consolidation Companies Work?

Specialized companies help you establish a baseline detailing your income, the total amount you pay for credit cards, interest, etc. They add up your expenses and determine how much you can contribute to your debts. For many people, the amount that is left in their budget is not enough to handle their debt, and they move closer to declaring bankruptcy.

And this is where a debt consolidation loan or debt management program comes in handy. Credit card debt consolidation completely changes the structure of your current debts and merges them into one lump payment. Thus, these solutions reorganize your debt and help you track your progress as you eliminate it.

Once a specialist evaluates your situation, they will determine whether consolidation will work in your case. If it does, you will enjoy the perks of having lower monthly installments, convenience, and simplicity. The most critical condition, however, is that you follow the plan precisely and never miss your payments.

In addition to smartly managing your debt, a debt consolidation company makes the situation less stressful. Creditors tend to be very annoying and persistent with their calls. But when you enter a relief program, the situation will be handled by a specialized company. Your further communication with the company can be conducted online. This way, you can focus on growing your income instead of constantly explaining your situation to creditors.

Debt Consolidation for Bad Credit Scores

It makes sense that borrowers with excellent credit receive the best terms. However, people with average or even bad credit scores still have a chance to get approved. Here are ways that will help you get debt consolidation loans for bad credit:

• Check your credit report – You may discover some erroneous accounts or inaccurate missed payments. Even if the mistakes in your report are insignificant, they can make a difference in the outcome.
• Add a co-signer – If your potential co-signer’s credit score exceeds yours and they agree to help you out, you may qualify for a lower rate.
• Improve your debt-to-income ratio – Lenders tend to use this metric to assess your ability to repay a loan. If you make this figure more appealing to them, your chances of better terms are higher.

If you decide to pursue a debt consolidation loan, remember that not all loans are created equal. You don’t want to be taken advantage of simply because you have a bad credit score. An expert will select the best one possible so that anyone can benefit from consolidation.

Debt Consolidation with a Loan

In a nutshell, a debt consolidation loan involves taking out one big loan, which you use to pay off your current debts. Thus, instead of dealing with multiple repayments schedules, varying sizes, and interest rates, you create a simplified arrangement.

Since you have only one lending institution at a single interest rate, it will be easier to calculate your monthly budget. Also, you are less likely to forget about making a timely payment since you need to do it only once. You can even automate the process and have it sent at a specified time.

However, you need to take this new loan seriously. Obviously, your goal is to improve your financial situation, not make it worse. Therefore, determine whether the new payments terms are reasonable. If you fail to stick to them, you will do substantial damage to your credit.

Debt Consolidation Without a Loan

A credit counselor arranges a debt consolidation program. They contact your creditors and act on your behalf to help you pay off your debt over time. They negotiate the terms when your debts are combined and reduce your interest costs significantly or entirely.

Such debt management plans involve you paying the agency, and they will contribute payments to creditors on your behalf. This way, paying off the loan becomes more accessible and faster without the need to take out an additional loan.

Debt consolidation without a loan can take other forms, such as mortgage refinance and balance transfer:

• The first option implies getting a new mortgage to replace the original one. As you repay your debts with the old mortgage, you will be left with only one new one.
• As for balance transfer, if you are accepted, you can take out a new credit card with zero interest and transfer your other unsecured debts to this card.

Alternatives to Debt Consolidation

Debt consolidation helps with making progress with your debt and putting more money toward your balance. However, it’s not a magic bullet. Even if these alternatives to debt consolidation don’t suit your situation, you should be aware of other options you have:

• Create a budget – Set realistic debt pay-off and savings goals. If you have insignificant debts or if your income can sustain them, you may be able to recover from debt with a well-thought-out financial plan.
• Get out of debt using the avalanche method – You can focus on paying off revolving debts with the highest interest rates. This method is not the cheapest, but it will save you money down the line.
• Consider the debt snowball method – In this case, you tackle the debts with the lowest balance. It will help you completely eliminate some of your debt and motivate you to keep moving forward.

In any case, you will benefit from having your financial situation evaluated by a professional. Whether you decide to enter a program or not, an expert will explain your options and help you select the most suitable one.

Make Paying Off Your Debt a Priority

If you want to accomplish your financial goals, you will need to put effort and dedication into it. Don’t let the initial discouragement of getting into debt paralyze you. Tackling your debt should become your priority – and consolidation can become an essential start of that journey.

“I need help with debt consolidation” – then you have come to the right place. We will explain what additional steps toward financial stability you need to take to make sure you never end up in a similar situation. Our goal is to equip you with the tools to move forward debt-free, even without our help.