How to Consolidate Your Debt? Assess Your Credit Card Debt Compile all your credit card bills and calculate a total amount owed; b average interest rate being paid; and c total monthly payment for cards.
This gives you a baseline for comparison purposes. It only works if you lower the interest rate on your debt and reduce your monthly payment. Review Your Budget If your monthly income is higher than expenses, you may be able to handle the problem yourself without consolidating debt. They will coach you through the budget-making process and their service is free. Make the Right Choice The three major choices for consolidating debt are a loan, a debt management plan or debt settlement.
Each one has pros and cons. Stick with It Consolidation is not a quick fix. The loans usually run years. Debt management programs take at least three years. Debt settlement can run years. Compare interest rate, monthly payment and pay off time before making a decision. How much money you owe and your available resources dictate the best option for consolidating debt. Both plans are based on reducing interest rate paid on the debt, thus making it easier to afford monthly payments.
The difference is that there is no loan involved in a debt management plan. If your credit card debt has ballooned to an unmanageable figure - a number so high that you can barely afford the minimum monthly payments - debt management and a debt consolidation loan are still in the mix, but it would be wise to add debt settlement.
If you own a home, a home equity loan also is an option. Debt Consolidation Loans A debt consolidation loan DCL allows you to make one payment to one lender in place of multiple payments to multiple creditors. A debt consolidation loan should have a fixed interest rate that is lower than what you were paying, which reduce your monthly payments and make it easier to repay the debts.
There are several types of DCLs, including home equity loans, zero-interest balance transfers on credit cards, personal loans, and consolidating student loans. It is a popular way to bundle a variety of bills into one payment that makes it easier to track your finances. All payments made during that time will go toward reducing your balance.
Another DIY way to consolidate your credit card debt would be to stop using all your cards and pay using cash instead. This can allow you to set aside a portion of your income each month to pay down balances for each card, one at a time. When you have paid off all the cards, choose one and be responsible with how you use it.
The first step toward bill consolidation is to identify which bills you want to include — credit cards usually top the list — then calculate your total monthly payment and the interest rate you pay on each card. The next step is to determine how much you can afford to pay against the debt on a monthly basis, while still having enough for basics such as rent, food and transportation.
Understand that each of these choices normally takes between three to five years to eliminate debt. Debt and bill consolidation takes patience, persistence and some organizational skills to turn around your financial future.
Should You Consider Debt Consolidation? Whether you choose a loan, debt management or debt settlement, it will take years to eliminate the debt. It is important than you undergo a behavior change that makes paying off debt more important than accumulating more of it. There are penalties for any consumers who continue recklessly spending with credit cards. For example, a debt management program can dramatically reduce the interest rates you pay on credit card debt, however, if you fall behind on the expected monthly payments, the creditors who granted those major concessions, can revoke them immediately and you are in trouble again.
If you go with a secured debt consolidation loan using your home or car as collateral, failure to make on-time payments could mean losing the home or car, which obviously leaves you worse off than before. That could make it difficult to get a loan for a car or home in that time. How do I consolidate debt and pay it off? The first step is to list the amount owed on your monthly unsecured bills. Add the bills and determine how much you can afford to pay each month on them.
Your goal should be to eliminate debt in a 3-to-5 year window. Reach out to a lender and ask what their payment terms — interest rate, monthly payment and number of years to pay it off — would be for a debt consolidation loan.
Compare the two costs and make a choice you are comfortable with. What type of loans can I consolidate? Any unsecured debt, which includes credit cards, medical bills or student loans.
Depending on the amount owed, the best consolidation loans are credit card balance transfers, personal loans, home equity loans and an unsecured debt consolidation loan. A good-to-excellent credit score is needed for credit card balance transfers. Peer-to-peer online lending has become a good outlet for personal loans. A home equity loan is a secured loan, which means better interest rates, but you are in danger of losing your home if you miss payments.
An unsecured debt consolidation loan means not risking assets, but you will pay a higher interest rate and possibly receive a shorter repayment period. What are the best loans for debt consolidation? Who qualifies for debt consolidation loans? Anyone with a good credit score could qualify for a debt consolidation loan. If you do not have a good credit score, the interest rate charged and fees associated with the loan, could make it cost more than paying off the debt on your own.
Can I consolidate my debt without a loan? A debt management program DMP is designed to eliminate debt without the consumer taking on a loan. A credit counseling agency takes a look at your monthly income to help you build an affordable budget. Counselors work with creditors to lower interest rates and possibly eliminate some fees.
The two sides agree on a payment plan that fits your budget. DMPs normally take years, but by the end, you eliminate debt without taking on another loan. If you choose a debt management program, for example, your credit score will go down for a short period of time because you are asked to stop using credit cards.
However, if you make on-time payments in a DMP, your score will recover, and probably improve, in six months. If you choose a debt consolidation loan, your poor payment history already has dinged your credit score, but paying off all those debts with a new loan, should improve your score almost immediately. Again, making on-time payments on the loan will continue to improve your score over time. Debt settlement is a no-win choice from the credit score standpoint.
You score will suffer immediately because debt settlement companies want you to send payments to them and not to your creditors. That's a big problem. So is the fact that a debt settlement stays on your credit report as a negative consequence for seven years.
Generally speaking, debt consolidation has a positive impact on your credit score as long as you make consistent on-time payments.
The two major factors involved in determining its effect on your credit score are a which debt consolidation program you use; and b how committed are you to making on-time payments? Are debt consolidation loans taxable? The IRS does not tax a debt consolidation loan. More importantly, it does not allow you to deduct interest on a debt consolidation loan unless you put up collateral, such as a house or car. How much does it cost to consolidate your debt? The cost of debt consolidation depends on which method you choose, but each one of them includes either a one-time or monthly fee.
You will pay interest on a debt consolidation loans and taxes on debt settlement. Generally speaking, the fees are not overwhelming, but should be considered as part of the overall cost of consolidating debt. Which debt consolidation plan is right for me?
There are so many choices available that it is impossible to single out one. The Federal Trade Commission recommends contacting a nonprofit credit counseling agency to determine which debt consolidation plan best suits your needs.
You may ask yourself, what does a credit counselor do? Credit counselors help consumers set up a budget and offer options to eliminate debt. Credit counselors are typically available for over-the-phone or in-person interviews, and their service is usually free.. Does debt consolidation work on a limited income? Debt consolidation loans are difficult for people on a limited income. You will need a good credit score and sufficient monthly income to convince a lender that you can afford payments on the loan.
A better choice might be to consult a nonprofit credit counselor and see if you are better served with a debt management program. Do lenders perceive debt consolidation negatively? Most lenders see debt consolidation as a way to pay off obligations. The alternative is bankruptcy , in which case the unsecured debts go unpaid and the secured debts home or auto have to be foreclosed or repossessed.
You may see some negative impact early in a debt consolidation program, but if you make steady, on-time payments, your credit history, credit score and appeal to lenders will all increase over time. What is debt consolidation refinancing? It means including other debts in a refinancing of your home. This is only a valuable if you have equity in your home market value is higher than mortgage balance and you receive a lower interest rate and monthly payment on your new mortgage.
Debt Settlement These two repayment methods are often confused with each other, but they are vastly different. Debt settlement companies promise to negotiate a lump-sum payment for less than what you actually owe with each one of your creditors. While this sounds ideal, there are drawbacks. Many creditors refuse to deal with debt settlement companies and debt settlements are a negative factor on your credit score for seven years. A debt consolidation loan is taking out a single loan to pay off several unsecured debts.