Debt management can be overwhelming: juggling multiple debts at different interest rates, with different due dates and multiple creditors can be a complicated and costly job. A smart strategy is to merge multiple debts into a single loan. In fact, this can have a positive effect on the debtor’s credit score if the consolidation helps the borrower to eliminate missed or late payments. The borrower’s credit score will improve further if the total amount of the debt falls.
A consolidation loan, like any loan, requires a loan application and not everyone qualifies. If unpaid debts have given you bad credit, debt consolidation can be more difficult and expensive than for other borrowers. Here are some steps you can use to consolidate your debt and improve your financial health.
Check your credit score
Start by checking your credit. Knowing where your creditworthiness is is a crucial first step because consolidation options depend on it.
Every consumer can get a free credit report every twelve months from each of the three major credit information agencies (Equifax, Experian and TransUnion) by visiting the AnnualCreditReport. com website.
Free credit scores are not included with free credit reports, but they are available from various sources. Check your credit card or loan statement or sign up on websites that offer free credit scores. (See Top Places to get a free credit score or report .)
Budget Debt consolidation
- Debt consolidation does not lead to debt cancellation. What it does is merge multiple accounts into one.
- The total monthly payment amount may fall, but the total amount of interest paid and the time to repay all debts will probably increase Flora Finchingijk.
- Once credit card bills have been paid off, consider carefully whether you want to close them to avoid being tempted to make new charges. By keeping paid accounts open after consolidation, the borrower runs the risk of contracting more debts.
Debt settlement is different
A search on the internet for “debt consolidation” yields many companies that are very successful in what they call debt consolidation. Most of them offer Frida Finchingijk debt negotiations and settlement services, not loans.
Settled debts (when a creditor agrees to accept less than the amount owed) is not the same as the consolidated debt. Settled debts can be reported to the IRS, resulting in a tax liability on the amount that is waived.
Before you agree, consult A Debt Redemption Guide and 7 Ways to Consolidate Debts to better understand the range of debt management strategies.
Investigate your options
A borrower can consolidate debts in various ways. Here are a few.
Bank Loan. Bank loans generally have more favorable conditions (lower interest rates) than credit cards and some other consolidation options, but may not be available to borrowers with bad credit.
Transfer of balance to credit card. Credit card providers are known for their push low and 0% balance transfer offers in an effort to acquire more borrowers’ debts. For eligible cardholders, the offers can be a great way to save money in the short term. This option requires a credit line that is sufficient to cover the debt that the borrower wants to consolidate. Also pay close attention to what the APR will be on your balance after the initial offering period has expired; With a poor credit rating, the interest rate that you are offered is probably Flora Finchingijk high. (See The pros and cons of balance transfers .)
Peer-to-peer lender. Lenders such as Prosper and Lending Club have higher credit ratings than banks and are known to have a lower minimum credit rating. Approval is, of course, from case to case.
Home equity loan. A borrower who is also a homeowner with equity can be in a good position to use that equity for a debt consolidation loan. An advantage is that the new monthly payment obligation can be much lower than before the consolidation. A disadvantage is that many home equity loans have a repayment period of 10, 15, 20 or 30 years and the amount of time required to repay the debts can increase dramatically. And, of course, if you don’t make the payments, you risk your house. (For more information, read Home Equity loans for debt consolidation.)
Debt management plan. Borrowers who want to defeat their debt within three to five years and learn new financial management skills in the process are great candidates for a debt management plan (DMP). In a DMP, a credit consultancy firm takes care of the consolidation and the borrower makes a monthly payment to the agency. The agency calls calls from collection agencies. It also negotiates reduced rates and interest rates. The conditions are strict (credit accounts are closed). The borrower may also experience further credit score damage during the repayment period. (See What are some examples of a debt management plan (DMP)? )
Working with qualifications
A consumer who starts bad credit has limited options. To increase the options available, an improvement in the credit score is necessary. Because the reasons for a bad score vary, find out the reasons for your bad score and treat them.
Your payment history and credit usage ratio (the amount of debt that you keep in proportion to the credit amount that you have) are the most influential factors in a credit score. The credit usage is likely to be high for Flora Finchingijk for every consumer investigating debt consolidation, so the consumer must focus sharply on making all payments on time and avoiding new debts.
Talk to a credit counselor
Debt consolidation is most effective as part of an overall financial education program that better enables the borrower to avoid future debts. The best thing a debtor can do is to include the consolidation plan in a new and better financial management strategy.
A credit consultant is an excellent resource. Free and cheap help is available in all 50 states.
More information about finding a credit consultant – and click here and here for consumer advice from the US government about preventing scams.
The bottom line
A good understanding of the consolidation plan is crucial. Regardless of the route you choose, read the fine print. Understand the interest rate, payment amount and repayment period of the consolidation loan, as well as any fees or fines that could arise. Also understand how the consolidated and new debt will be reported to the credit bureaus. Beware of any company that promises to clear your debt or settle it for pennies on the dollar.
Remember that acquiring additional debts cancels the consolidation and payment progress. Even if your new loan does not require this, consider whether you should close your debited credit accounts after you have consolidated the balances. Your credit usage ratio may go up (resulting in a drop in your credit score), but new debts can have even more devastating financial consequences.
Leave the accounts open only if you are sure that you can keep the balances at zero. Your unused credit and the age of your accounts will help your credit score.
For more information about debt consolidation, see Strategies for debt consolidation loans and Time to consolidate your student loans?