Debt Consolidation Tips That Will Make Creditors Smile
Debt consolidation helps roll multiple debts into one single payment and helps you fulfill your goal of debt free living. It can be a good choice if your debt isn’t excessive and you also have good credit. Learning some more debt consolidation tips can help you decide if the process will be worth it for your debt.
There are plenty of debt consolidation tips but it’s important to follow these top ones in order to get the best option.
Acknowledge the Root of the Problem
Many people turn to debt consolidation and look up debt consolidation tips because their spending gets out of control. It can be a knee-jerk reaction. If you aren’t coming to terms with how you got into debt, it can happen again. If you don’t change your old habits, you will end up in the same spot. Replace any old habits with new ones. Track spending on a regular basis and evaluate the differences between wants and needs. Using a debt tracker can help.
Check Your Credit Score and Report
One of the first things you need to do is to check your credit report for accuracy. An error on your report can prevent you from qualifying for the debt consolidation help you need. If you find an error, you need to dispute it. You can get free annual credit reports to understand what’s inside your credit report. Once you know where your credit stands, you will have the information to know which credit card consolidation plan works best for you.
Do the Math
Credit card consolidating can save you money, but it's usually not free. There may be a balance transfer fee so you need to check to see if the cost outweighs any potential benefit. Promotional interest rates expire at some point so you need to make sure you are able to repay your debt within that time frame. If you don’t then you may not be saving money at all.
This is also the same case for a debt consolidation loan. Ask your lender about loan origination fees and make sure the loan payment is something that fits into your budget. If you don’t pay the personal loan on time then it hurts your credit. On the flip side, if you stay on top of payments then it can help with your credit score since you have a solid payment history. No matter what debt consolidation option you consider, ask about any fees and factor those into your decision to see if it is worth it.
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Compare Consolidation Products
Since there are different ways to consolidate debt, you need to compare consolidation products. Balance transfer cards can be a good option and the best ones offer no interest for 15 to 21 months. However, after this time frame, a double-digit interest rate will kick in. You usually need a high income and a good credit score to qualify.
In order to increase your chances of qualifying, add up all your potential sources of income and list that on your application instead of just your salary. Debt consolidation loans can usually come with a low rate and you don’t have to worry about paying off your debt in just a few short months before a higher interest rate kicks in. You likely won’t get zero interest like balance transfers but you should have more time to pay off the loan.
Always Pay Attention to Hidden Costs
Whether it’s a balance transfer or a debt consolidation loan, you need to pay attention to any hidden costs. It’s important to take your time when shopping for a loan or a credit card for balance transfers so you are getting the best rate.
Pay Attention to Debts You Are Consolidating
Not all debt is created equal. While there may be no such thing as good debt, you have to pay attention to what debts you are consolidating. You don’t want to roll your student loan debt into your mortgage or a private loan. There are programs that can help, especially if you have federal student loans. You may get a deferral or relief if you can demonstrate financial hardship.
Rolling an unpaid balance on your car loan into a new car loan may not be a good idea. Doing this can mean you are paying more on the vehicle than it is worth.
Enlist Moral Support
Debt sometimes feels like a shameful topic but having peer support can be a great motivator. A close family member, online forums, or debt support groups can keep you on track to help you reach your goal. Online lenders may offer recommendations or apps to help keep you motivated and on the path to paying off your debt.
Stop Using Your Cards
One of the cardinal debt consolidation tips is to not get any more debt so it’s best to stop using credit cards.
Debt Consolidation Tips to Avoid Running Up Debt
One of the main debt consolidation tips is to avoid running up debt again.
Pay in Cash Whenever Possible
Be sure to stay within your spending limits and avoid impulse purchases. It’s best to avoid those “buy now, pay later” interest-free financing offers since these offers mostly just postpone debt. Before making major purchases, compare prices. Take only cash with you to buy the item and only spend what you have. If you aren’t able to avoid borrowing then use the lender that offers the lowest interest rate for which you qualify. Keep an eye on your bank balances and avoid bank overdraft charges.
Watch Out for Credit Repair or Credit Counseling Scams
These scams appeal to customers with poor credit histories and promise to help clean up credit reports or get loans. After customers pay hundreds of dollars in upfront fees, these companies don’t do anything to fix the report or help to get a loan. Be careful of promises that seem too good to be true and always work with a reputable agency after you check with the Better Business Bureau. Avoid paying upfront fees and be aware of any high fees.
Create a Budget and Stick to It
Once you have identified the root problem for what is causing you to overspend, you need to come up with a budget. Sticking to the budget is the next step after taking a look at your spending habits. Stay focused. Repaying your debt can take months or even years. Review statements to hold yourself accountable. This helps you make progress and keep financial goals in mind.
The Process of Debt Consolidation
There are two different ways to consolidate debt and both concentrate your debt payment into one monthly bill. You can get a 0% interest balance transfer credit card. You then transfer your debts to this card and pay it off within the promotional period. With a debt consolidation loan, you use the money to pay off your debt and then pay the installments over a set term.
Which Is Better?
There are debt consolidation tips for both credit card balance transfers and debt consolidation loans. Your unique situation can help you decide which is best.
Credit Card Balance Transfers
A credit card balance transfer can be the best option if you know you will pay off debt quickly. With the best case situation, you don’t pay any interest. Not having any interest can help you stop the bleeding since your loan balance doesn’t grow and each payment you make just goes toward reducing debt. You likely do have to pay a fee on transfer balances. Costs are around 3% of the transfer amount or a flat dollar amount, whichever is larger.
Any savings you have from getting a lower interest rate may cover the transfer fee but this is why it’s important to do the math. A balance transfer may not be bad for your credit but they can cause some problems. When you are applying for a new card, lenders look at your credit history. Having too many accounts, such as too many credit cards, can lower your score. You need to avoid using the credit card until you pay off your debt.
Debt Consolidation Loans
A large loan can allow you to combine several different debts and put them all into one place. This isn’t something you can do with a balance transfer. With a debt consolidation loan, not only can use the money to pay off your credit card debt but also other debts, such as your car payment. You may not have any upfront fees with a debt consolidation loan. Some loans do have fees. Sometimes the cost of the loan is built into the interest rate. When you compare several different loans, you can find the right combination of interest rate and fees that will benefit you.
The interest rate you pay depends on the loan you use. If you plan on paying off your debt over several years, you may be better off with a debt consolidation loan. Just like with a credit card, a potential lender will pay attention to your credit score. Your credit score can be higher when you use a mixture of different lines of credit and loans so adding a loan into the mix can help to improve your credit.
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Should You Consolidate Debt?
When looking at debt consolidation tips, before you start with it you will need to decide if debt consolidation makes sense for your situation.
Debt consolidation can be a good idea if your total debt minus your mortgage doesn’t exceed more than 40% of your gross income, your credit is good enough to qualify for a low interest loan, your cash flow can cover payments toward your debt, and you have a plan to prevent running up debt again. For many people, debt consolidation can be the end of a tunnel.
If you take a loan that can be paid off in three years then as long as you make payments on time and manage your spending, your debt will be paid off in those three years. When you make minimum payments on your credit cards, it can mean years or months of paying it off and you also accrue even more interest. However, it’s important to note that debt consolidation may not solve all debt problems. It won’t address any excessive spending habits in the first place. It’s also not the best solution if you are so overwhelmed by debt and don’t have any hope.
If your debt load is small and you are able to pay it off within six months at your current pace then it may not make sense to consolidate your debt and you can use a debt repayment method such as the debt avalanche or debt snowball. If your debt is more than half your income and a debt repayment calculator reveals that debt consolidation may not be your best option, you may be better off seeking some other option.
How Does Debt Consolidation Affect Your Credit Score?
Debt consolidation can help improve your credit, as long as you stick to the plan and follow some debt consolidation tips. When you consolidate your debt, you are pulling several levers at once that could either harm or help your credit.
New Credit Applications
The first damage that could happen to your credit score occurs before you even start to consolidate. When you apply for the balance transfer credit card or the personal loan, the lender does a hard inquiry on your credit, which can lower your score by a few points.
New Credit Account
When you open up a new credit line or personal loan, it also temporarily lowers your credit score. Lenders look at new credit as new risk so scores will have a temporary dip when you take out a new loan.
Lower Average Age of Credit
As your credit accounts get older, it shows a positive history of one-time payments and you get an increase in your credit score When you open a new account, your newest account lowers the average account age and can also lower your score.
Lower Credit Utilization Ratio
This ratio is a measure of how much of the available credit you have that you are using. This can fall when you have a new account because it increases your available credit. Lower credit utilization can counter some of the negative effects that happen when you open new credit.
Improved Payment History
It takes some time but if you make your payments on time then you can see your credit score improve with your improved payment history. The payment history is one of the biggest factors in the credit score so it always helps to pay on time.
Getting Approved for a Debt Consolidation Loan
It can be easy to qualify for a debt consolidation loan if you have a good credit score but you can still have options even if you don’t have the best credit. Use these debt consolidation tips to help improve your chances.
To get the best interest rates, you usually need a credit score of 700 or above. Many lenders do require a minimum credit score of 630 or 640 in order to qualify. If your credit score drops below this level, you can still qualify but you may have larger origination fees and higher interest rates. If you do have bad credit, look at these options:
Your Local Credit Union
Since credit unions are not-for-profit organizations they can usually offer loans with better terms than you can get from a traditional bank. There is more leeway to lend to members, especially if you have already built a positive relationship with them. If you are a member of a credit union then start talking to a loan officer about qualifying. Credit unions may look beyond just your credit score and look at your whole financial history, your relationship with the institution, and your personal circumstances.
Online Lenders
Online lenders are a good place to begin looking for debt consolidation loans. With online lenders, you are able to compare rates without an impact to your credit score. You can easily and quickly apply with lots of paperwork or by visiting a place in person. You can get funds much quicker than with other options.
Your Home Equity
If you own a home and there is equity built up in it then you can also use a home equity loan to consolidate your debt. Technically, it’s not a debt consolidation loan but it can help you get a lower interest rate since the loan is secured by your home. There is a drawback with this type of loan. If you default on this loan then the lender can foreclose on your home. It’s only a good idea to use this loan if you are certain that you won’t have any problems repaying the loan.
If you have bad credit, be wary of predatory lenders. Some debt consolidation lenders are predatory in nature and this is true of lenders who work with people with lower credit scores. Avoid lenders that charge triple-digit APRs. Accepting a loan with such a high interest rate can be expensive and cause you to go deeper into debt. It also defeats the purpose of this loan.
Steps to Getting a Loan
One of the best debt consolidation tips you can read is how to get a loan.
1. Check Your Score
Since lenders base the decision on your credit, you need to check your score before you begin.
2. Shop Around
It’s not usually a good idea to accept the first loan you see. While this may be the best, you won’t know it until you shop around. Take your time and compare loan options from different lenders. This is much easier with online lenders but you can still do it with loans from brick-and-mortar locations. In addition to comparing the interest rate, you also want to check repayment terms, fees, and any other fine print items that may affect the cost of your loan. Remember this process will take time but it may be able to save you thousands of dollars if you do it correctly.
3. Consider a Secured Loan
A typical debt consolidation loan is usually unsecured, which means it doesn’t require any collateral. If you are having a hard time getting approved for an unsecured loan then you may want to consider a secured loan. Secured loans do require some form of collateral, such as a home or vehicle. The collateral needs to be worth enough to cover the loan amount in case you default. Since there is collateral it’s easier to get approved for a secured loan and you may even get a better interest rate.
4. Improve Your Credit
If you have already done everything you can to get a loan then you may need to wait until you get a better credit score. Make it a goal to pay your monthly debts on time every month and work to pay down your current credit card balances. This can help you boost your credit score.
Benefits of Debt Consolidation
While debt consolidation loans should be taken on with caution, there are still a number of different benefits. If you are able to pay off the loan in a timely manner then you can save money, improve your credit, and reduce your stress.
One Monthly Payment
One of the most obvious benefits is that it simplifies your monthly payments and consolidates all of your accounts under one balance. When you have one payment to remember each month then you are less likely to miss your due date. This can be an important thing since if you miss one payment, it can rack up late fees and make it harder to pay down your debt.
Lower Interest Rate
Credit cards have some of the highest rates so if you can get a debt consolidation loan with a lower interest rate then you can pay off debt faster and save money.
Increase Your Credit Score
There is the potential to improve your credit score if you do it correctly. Once you pay off your credit card debt with the loan, you still want to keep your cards open so that you aren’t taking an additional hit to your credit score.
Stop Collection Calls
If your debt is in collections then you are likely receiving constant calls from your debt collectors. Once you pay of your debt with the loan then calls are stopped.
Difference between Debt Consolidation and Debt Settlement
Debt settlement and debt consolidation are two very different things but sometimes the terms can be used interchangeably. With debt settlement, you hire a company that negotiates a lump sum payment for your creditors for less than what you owe. These companies charge a fee for their services and this fee can reach up to 20% of your debt. Debt settlement companies will often tell you to stop making payments on debt, which can result in a big hit to your credit.
Alternatives to Debt Consolidation
One of the many debt consolidation tips is to determine if it is right for you. If it’s not right for you then there are some other alternatives.
Do It Yourself Fixes
You can overhaul your budget and see where you can cut costs in order to free up some more money for debt elimination. You can also renegotiate the terms of your debt on your own. Your lenders may be willing to lower your interest rate or work with you in other ways. Ask for a due date adjustment. You might be able to schedule your payment due dates on the same day. This isn’t quite the same as debt consolidation but it can help you keep track of your payment easier.
Debt Management Plan
A debt management plan can help you consolidate your debt. In the program, you make one monthly payment to the credit counseling agency, which covers multiple bills for the month. The agency then pays your creditors on your behalf. Most plans take up to 60 months to complete and some charge program management fees for the service.
The above options are good for those who can qualify for a lower interest rate. If you are in dire debt and can’t afford your monthly payments then you may need to consider debt settlement or credit counseling. Credit counseling agencies can help by being a middleman between your creditors and you. Credit counselors can help you understand your credit report and suggest steps in order to improve your credit score and get financial stability. Some agencies may offer limited services for a fee.
Final Thoughts
Debt consolidation can be a good option if you have a moderate amount of debt that can be repaid in a few years. There are different options for you to consolidate your debt and you need to research each one for your situation.
There are different debt consolidation tips you can use. One of the most important debt consolidation tips is to shop around to make sure you are getting the best deal. There are differences between debt settlement and debt consolidation, even though the terms have been used interchangeably. If debt consolidation isn’t right for you, there are alternative options available.