Debt consolidation is a method to merge all of your loans into one. While that is a simple concept, debt consolidation is anything but simple. If you are deciding whether or not to consolidate debt, or just want to learn more, follow along with this beginner guide to debt consolidation.
What is debt consolidation?
Debt consolidation is a personal finance strategy to merge your debts into one new loan. For example, let’s say you have three credit cards with a $3,000 balance, a $4,000 balance, and a $1,500 balance. In this scenario, you have to pay three credit card bills per month. With debt consolidation, you can combine them into one one credit card with an $8,500 balance and only have to make one monthly payment.
You can consolidate debt in many different ways. For example, you could pay off credit cards with a personal loan, pay them off with a new credit card, or even pay them off with a mortgage refinance where you pay off your credit cards using home equity. There is no wrong way to do it, but for today we are going to focus on consolidating credit cards with a new credit card, as this is one of the most common debt consolidation loan techniques.
Is it a good idea to consolidate your debt?
Just because you can consolidate your debt doesn’t mean you should. Debt consolidation impacts your credit and your bank account. Unless you find the best debt consolidation credit card with low balance transfer fees and low-interest rates, you might end up consolidating and getting stuck paying more than you do today.
If you do consolidate your debt, you want to do so on a credit card that charges a lower interest rate than your current card. Some debt consolidation credit cards offer a 0% APR introductory period with no or low balance transfer fees. Ideally, you can pay off your balances in full during the 0% period, as a bigger portion of each payment goes to lower your balance.
If your cards charge the average rates today, which can be as high as 29% in some cases, a small balance transfer fee is reasonable, as that is cheaper than paying high credit card interest rates.
Do debt consolidation loans hurt your credit?
You may wonder if debt consolidation loans hurt your credit score. In the short-term, opening a new credit card will slightly hurt your credit score, as a new credit inquiry and brand new account both adversely affect your credit.
However, if you use the credit consolidation to pay down your balances, you should see a long-term increase in your credit. The second biggest factor in your credit score is your outstanding debt balances. The best balance for a high credit score is $0. If you use debt consolidation loans to save on interest and pay down debt, you will see a long-term credit score improvement.
Should I hire a debt consolidation company or do it myself?
While there are some companies you can hire to consolidate your debt for you, there really is no need to hire such a company. While they may come through and help you in the end, you can do everything they offer to do very easily without spending any extra money.
If you are in a position where credit card consolidation makes sense, it is important to save everywhere you can to pay off that debt as quickly as possible.
Is it good to do debt settlement?
If you have so much debt you struggle to pay the bills, you may be tempted to do a debt settlement instead of, or in addition to, a credit card consolidation. In all but a few rare cases, you should never do a debt settlement for a variety of reasons.
One of the most important reasons to avoid a debt settlement is protecting your credit score. When you do a debt settlement, your credit report is updated to show the event. This hurts your credit score and odds for approval of the best credit cards, loans, and interest rates for years in the future.
How to consolidate your credit card debt
If you want to consolidate your credit card debt, follow these simple steps. But before you begin, make sure you do the math and pick a balance transfer credit card with a lower interest rate than your existing cards. If you transfer to a higher interest rate, you will end up spending more money!
- Research and pick the best balance transfer credit card.
- Enter your consolidation information during the application process if applicable. If not, follow your new card’s procedures for a debt consolidation, which may utilize a paper check or an online form.
- Wait for your new card issuer to pay off your old cards and charge the balance to your new account.
- Pay off your debts!
Every debt consolidation is unique
No two people have the same personal finances. That’s why they are called “personal.” If you do the math and a debt consolidation makes sense, charge forward and go for it. You don’t need to pay anyone to help you through it. In the end, you should save money. Hopefully, you’ll end up debt free!
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This article was last updated April 13, 2018 but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.