It has been ingrained in us that by having multiple accounts open it helps our credit. But what happens when you get in a little over your head and are now struggling to pay on these multiple accounts you’ve now opened? Debt consolidation could be a great option for you. What is it exactly, and how does it work? Let’s dive in.
When to consider consolidating
A lot of us fall for the promotion at the counter when the cashier offers a nicely sized discount if you apply for their store credit card. A lot of the time if you use their card in the future you get additional savings as well; and it wouldn’t make sense to pass up an opportunity to save money. Now that they have sold you on the idea, you justify getting it even further because we have been told that having multiple accounts open looks good on our credit report and gives it some diversity. But before you know it, you forget to make the payment or you feel a little too comfortable using it and you rack up a little debt. It doesn’t seem so bad, until you have the exact same situation repeated with multiple accounts. The accounts you have open more than likely have a high interest rate, making it difficult to keep up with if you have multiple accounts. This is where debt consolidation can come into play.
A good way to indicate if debt consolidation is the right option for you is if you find yourself in any of the following situations… If your debt, not including your mortgage, does not exceed 40% of your gross income. If you have enough monthly cash flow to cover the payments that go toward your debt. Or, if you have good enough credit to qualify for a low interest consolidation loan or 0% interest credit card.
What consolidating debt can do for you
If you are having a hard time keeping up with the payments you can consolidate all your loans into one. This helps to alleviate the stress of paying on the high interest loans each month and it combines all the money you owe into one easy place with one fixed interest rate. Think of it as reorganizing your debt. The debt is still there but it is more manageable and will save you money in the long run. It also gives you the opportunity to pay it off faster than if you had to pay each loan individually. If you do this early enough, it can help to save your credit before it spirals out of control. In order to get a consolidation loan to begin with, you’ll need to have decent credit.
How to consolidate
There are a few options available for you to choose from when it comes to consolidating your debt. There are two more common and safer ways to consolidate your debt. The first is to get a 0% interest rate balance transfer card. If you don’t have a large amount of debt and think you will be able to pay it off quickly, this option is great. This allows you to transfer all your debts onto the card and if you pay the balance in full during their promotional period, you don’t pay any interest. The second of the two safer options is to get a fixed rate debt consolidation loan. This gives you a set term so you can see the end of your debt and it gives you a fixed interest rate so you will not continue to feel buried by multiple high interest rates each month.
There are two additional ways you can consolidate your debt but they have a little more risk involved. You can take out a home equity loan or a 401(k) loan. These are options that are still on the table but can be risky because if you default, your home and your retirement can be in jeopardy. When deciding on which option will best suit you and your financial situation it is important to take your credit profile and score into account, as well as your debt to income ratio. Also choosing an option that you feel comfortable with is crucial.
Reasons not to consolidate
There are a lot of great reasons to consolidate your debt, but just by doing so will not be the only solution to your financial issues. If you consolidate your debt but have no intention of making the payments, it will not help you at all. You will still find yourself in the same tight situation as before. If you only have a small amount of debt that you would be able to pay off in around six months to a year, it may just be an unnecessary step that might not even save you much money. If you find that your debts are more than half of your income, you may want to consider some of the debt relief options out there rather than trying to stay afloat in the ocean with a pool noodle.
After you have made the choice to consolidate your debt, sticking to a budget will be extremely beneficial and will encourage you to stay out of debt. Consolidation gives you the chance to restart your financial habits and get you back on track. Utilizing this great resource can only help you if you put in enough effort to sustain the change.