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If you have an average of 3 credit cards and you borrowed 2 different types of student loans, it can be difficult to track each and every payment. When you buy your car or your dream house and add it to your list of debts, things can get more confusing. This is why a lot of people have considered consolidating their debts.
The basic idea of debt consolidation is to restructure your multiple credit accounts so you end up with one monthly payment. It is easier to track payments and make sure that you have the funds at the right time of the month.
As mentioned, there are various ways to consolidate debt and in this article, we will discuss 30 things that you need to know before you follow through with it.
5 truths about how debt consolidation solves your debt problem
Let us start by finding out how this debt solution can solve your credit situation. Here are 5 important truths that you need to learn about consolidating debt.
- A debt consolidation loan is not the same as a debt consolidation program. There are many ways to consolidate debt. A debt consolidation loan involves borrowing a new loan to pay off the multiple debts to end up with one monthly payment. A debt consolidation program involves the help of a professional (credit counselor) who will take care of the consolidation for you. They will help negotiate with the creditors and lender to change your terms (e.g. monthly payments, interest rates, etc) to restructure your debts to fit your budget better.
- You are only restructuring your debts. Consolidating your debts does not really pay it off. It is more of restructuring it so it is more budget-friendly. The restructuring will depend on what you want to accomplish. If you want lower monthly payments, you can stretch the payment terms into a longer one. You can also aim for a lower interest rate. But if you are after savings, then you should target to shorten your payment terms to lower the interest amount that you will pay.
- It deals with the symptoms, not the root cause. Another important truth about consolidating multiple debts is the fact that it will only treat the effects of debt. It will make payments easier but it will not solve the reason why you are in debt. If you really want to solve your debt problem, you need to look at the reason why you ended up with multiple credit accounts.
- It helps you build your credit as you pay off the debt - at least if you use debt consolidation loan. Since this involves a new loan, paying it off regularly and the gradual decrease of the balance will help you improve your credit history. It is like hitting two birds with one stone. You pay off your debts while increasing your credit score.
- Debt consolidation is not always the best solution for everyone. While this is a great option to get out of debt, it is not the only solution that you can opt to use. There are some borrowers who are better off using debt settlement or debt management. If you are confused about what you should really use, you may want to consult with a professional. Check with nationaldebtrelief.com - top Debt Consolidation Company. You can call the company can talk to one of their IAPDA certified debt experts. The initial consultation is free. You can get professional advice on the type of debt solution that can help you with your credit issues.
5 facts about the real cost of debt consolidation
When you are trying to get out of debt through debt consolidation, it will entail some costs. Unless you understand these costs, you won’t be able to create a strategy that will help you pay off the debt with the least amount of money. Here are 5 important facts about what you will spend if you choose to consolidate your debts.
- It is not always a guarantee that your interest rate will be lower. There are many factors that will lead to a lower interest rate. One is your credit score. If you chose to borrow a loan to consolidate your multiple credits, a high credit score is necessary to lower your interest rate. If you will use a secured debt (e.g. home equity loan), the collateral will help lower your interest. In case you want to negotiate for a lower rate, this will entirely be at the discretion of the lender or creditor. If you displayed good payment behavior, you may be able to sway them to lower your rate - but it is not always a guarantee.
- A lower interest rate on a debt consolidation loan can change. A perfect example is consolidating through a balance transfer card. This card usually offers a very low-interest rate as an introductory promo. It is meant to encourage consumers to transfer their high-interest credit card debts to the new card. However, this is only applicable for a certain period. The rate will go up after a certain time.
- A debt consolidation program does not always have to be a lower monthly payment. Some people think that the main purpose of consolidating debt is to lower the payments. This is not always the best course. If you really want to save, you need to shorten the payment period. That means the monthly payments will be bigger. The bigger the amount, the more you can save in the long run.
- A lower monthly payment and a lower interest rate do not mean you save money. In connection with the 3rd, you have to remember that a lower monthly payment, even if it is with a low-interest rate, will not guarantee that you will save money. In fact, you will even spend more. As long as the repayment is longer, it will cost you more.
- Debt management companies charge fees. There are a lot of debt management companies or credit counseling agencies that will not charge fees. However, there are also those that will require you to pay a service fee - specifically if you enroll in their Debt Management Program. In most cases, the credit counseling service is free. But when you ask them to consolidate your debts through a Debt Management Plan, that would cost you.
5 tips when using credit cards in debt consolidation
Using your credit card to consolidate debt is possible through balance transfer cards. You literally transfer the balance of multiple debts and put it in that new credit card. Here are important things you need to know about this type of debt consolidation.
- There is a balance transfer fee. This will vary depending on the creditor and the amount that you will transfer. Usually, it is a percentage of the debt that you will transfer. The usual rate is 3%. If you will transfer $5,000, you need to pay $150 upfront.
- The introductory interest rate may be low or 0% - but it is only for a limited time. Credit card companies usually use this to encourage new borrowers to transfer their debt to the company. However, the zero to low-interest rate is only for a short time - between 6 months to a year. After the introductory period, the card will have a higher rate - and that would cost you more.
- You might end up with a higher interest rate if you fail to meet your payment. Sometimes, one mistake can forfeit the low interest rate that you got when you applied for the card. Make sure you read the fine print carefully. One late payment might cut short the introductory rate and you could end up with a high-interest rate card.
- The balance transfer card can be used for new purchases, but it will not follow the low-interest-rate of the credit card. This is still, primarily, a credit card. You can use it for new purchases but it is really not advisable. You want to make sure you pay off the balance first.
- You can transfer other debts - not just credit card debts. Unknown to consumers, balance transfer cards can also be used to pay for personal loans and auto loans. Any other monthly installment loans can be consolidated. The bank usually issues a check that will be used to pay for these other loans.
5 techniques when using loans in debt consolidation
One of the most popular ways to consolidate debt is through a loan. In fact, when faced with too much debt, it is easy to think that borrowing a huge loan to pay off the smaller ones is the best option. While debt consolidation loan, as this debt solution is called, is a great option, there are a couple of techniques that you need to know in order to maximize its effects on your credit situation.
- Make sure you have a high credit score to get a lower interest rate. A high score means you are a responsible credit borrower. The lender or creditor will not feel the need to protect themselves against the possibility that you will run off and not pay your dues. Sometimes, high-risk borrowers are given a high interest so the lender can get as much of the profit back from the loan.
- You are changing lenders and payment terms. You have to realize that with debt consolidation loans, you are not only changing the terms, you could also change the lender. While some people are able to negotiate a lower rate with the original lender, this does not always happen. Usually, you get a better rate from another lender because that is their way of convincing you to choose them over an existing bank.
- Your payment will be a consistent amount each month. At least, this is true if you got a fixed-rate debt consolidation loans. This can be a welcome relief especially if you have mostly credit card debts that have varying monthly payments or if you have a variable rate on your loan. Having a consistent amount each month makes it easier for you to budget your money.
- The low-interest rate that was advertised may not be applied to your loan. It will still depend on your credit score. This is why you need to cautious of advertisements. Do not always assume that the same will be applied to you.
- This debt solution can improve your credit score at the same time. As you continue to pay off the loan, this will also help you improve your credit history. This will still take consistent work so you have to make sure that you stay committed to your debt consolidation plans.
5 things you must know before you hire a credit counselor for debt consolidation
Some people seeking to consolidate their multiple loans choose to hire a credit counselor to help. For some, this might seem like a waste of time and money. However, if you have the financial resources to pay off your debt but you are too busy to focus on paying off each and every debt, then hiring the service of a credit counselor makes a lot of sense.
Of course, this has to be done with a lot of consideration. The well researched debt consolidation reviews will help you find the right counselor that fits your requirements. The professional you will hire should not only help you pay off your debt, they should assist you in reaching your financial goals by making sure you do not land in the same debt situation again.
Before you hire a credit counselor, here are a couple of things that you need to remember about this debt relief option.
- Credit counseling is not the same as debt management. The former is focused on educating people about debt. The latter is a more proactive approach to dealing with debt. Credit counseling is usually completed by most borrowers. Debt management, on the other hand, is an option. Sometimes, people who have gone through credit counseling gain the insight that allows them to complete their debt payments on their own.
- When your loan is under a Debt Management Plan, you cannot use your credit cards. The DMP is the payment plan that you need to follow to completely pay off your debt. While under this plan, the creditors will freeze your account. This is a great way to control your spending so you do not add more to what you already owe.
- Nonprofit debt consolidation companies have a long relationship with lenders. This can be used to your advantage - specifically when having the DMP approved. Credit counselors usually negotiate with the lenders or creditors for a lower interest rate. Their relationship with the lenders will come in handy during the negotiation process.
- Debt management usually cannot negotiate the amount of your debt - that is debt settlement. Take note that in this program, the amount is not negotiated. What you owe cannot be reduced. What the counselor will try to negotiate is a lower interest rate or a lower monthly payment.
- One mistake can be costly. You have to be careful in following your DMP. One late payment or mistake can forfeit the plan. You will be forced to revert to your old payment terms and a higher interest rate. It is even possible that you will be asked to pay a fee.
5 ways debt consolidation can reduce debt
If done correctly, debt consolidation can effectively reduce your debt. Here are the 5 ways that you can achieve debt reduction when you consolidate debt.
- If you negotiate better terms. Sometimes, you can negotiate more flexible terms to help you save. For instance, changing your terms from a variable rate to a fixed interest rate could help lower the interest amount that you have to pay for the whole loan. Or you can negotiate to remove any annual fees or charges. Unless you negotiate with the lender or creditor, you wouldn’t know that there is a possibility to save more.
- If you lower your interest rate and shorten your payment term. Most people think that a lower interest rate is enough. However, that is not always the case. If you have a longer payment period, that will cost you more in the long run. The best way to make the low-interest rate work in your favor is to shorten your payment terms.
- If you freeze your credit accounts. When you enroll in a Debt Management Program, the creditors will freeze your credit accounts while you are completing your plan. This will help you avoid adding more to your debt. While it will not directly reduce your debts, it will help expedite the process of paying off your balance.
- If you make a lump sum payment. A lump sum payment will shorten your payment terms and in effect, lower the interest amount that you will pay on your loan. Even if you do not lower the interest, you can still reduce the total amount that you will pay.
- If you settle your debts. Finally, you can choose to settle your debts. This is a direct way of reducing what you owe. You will negotiate with the lender or creditor to allow you to pay only a portion of the debt and have the rest forgiven. It is like paying pennies for a dollar.
If you need to know more about debt consolidation, check with nationaldebtrelief.com - top debt consolidation Company. We have friendly debt experts who can answer your questions about the best way to pay off your debts.