Do You Know the Best Ways to Consolidate Debt and Credit?
Editor’s Note: There is a lot of information available on how to consolidate debt, but much of it is confusing. Bills.com cuts through the fog with simple tips and tricks you can use to consolidate debt wisely. Read on and learn how to consolidate credit.
Define Your Goals
A smart first step is for you to define your goals. You need a clear understanding of what you want to achieve and how it will benefit you, in order to make the right debt consolidation choice. Defining your goals is such a crucial part of choosing the right way to proceed with how to consolidate credit that we recommend that you read our separate article on debt consolidation goals.
In this article, however, we focus more on clearing up any confusion about your different consolidation options and their effects. If you need help with your debts, consolidating your debt may be a great solution. Many different approaches exist, to help you consolidate debt, so you need to do your homework. Only by weighing the pros and cons of each solution, can you know the best option for your situation. Think about which of the following goals is most important to you;
- Improve Your Cash Flow: Reducing the size of your monthly payments frees up money you can use in a variety of ways.
- Get Out of Debt as Fast as Possible: Becoming debt free allows you to focus on building wealth, establishing a rainy-day fund, or buying a home.
- Protect Your Credit: You may need to weigh if it is worth harming your credit, in order to get out of debt faster.
- Get Out of Debt at Lowest Total Cost: Reducing your overall costs to becoming debt free puts more money in your pocket to use for achieving other financial goals.
- Reduce Your Debt Stress: Stress can come from fear of missing a monthly payment, repeated collection calls, or simply by the uncertainty of having no defined plan in place. Achieving greater peace of mind may be your primary goal.
1. What are Your Current Payments?
Your current payments are assumed to be the minimum amount you need to pay on each account. For credit card debts, your required minimum payment declines as your running balance decreases. Although you pay less each subsequent month, sticking to the required minimum payments costs significantly more money over time.
Minimum payments on credit cards typically range between 2.5% to 4% of your balance. So, if you have a balance of $5,000, your required payment would be between $125 and $200 per month.
If you can afford to pay more each month, consider an "optimized payment" strategy that accelerates your time to get out of debt. If you cannot afford your payments, you may want to explore credit counseling or debt settlement.
2. What are Optimized Payments as a Way to Consolidate Credit?
If you can afford a significant monthly payment (much more than your minimum payments) then Bills.com recommends the Debt Avalanche method, where you maximize what you pay toward the debt with the highest interest rate to avoid paying unnecessary interest, and then roll ALL of that payment to the next highest interest rate account, and on down the line, until all of your debts are paid off.
You can also perform a similar optimized payment process using the Snowball method where you start with your smallest account first (to get a personal sense of progress, by paying accounts off and achieving your goals) and then roll ALL of that payment up to the next account, and so on. Both Avalanche and Snowball require discipline and significant free cash flow in your budget, to make any real progress in paying off your debts.
3. What is Credit Counseling?
A credit counseling program may offer you a manageable way to becoming debt free, with minimal impact to your credit score. A debt counselor will review your financial situation. If you need outside help, for a fee the credit counselor will and create a debt management plan where you pay a single fixed monthly payment and funds are automatically distributed to your creditors. Typically, a debt management plan will provide a lower interest rate for each creditor than you are paying today and take approximately five years to complete
4. What is Debt Settlement?
Debt settlement is a consolidation solution that provides consumers with serious financial hardships a way out of debt while avoiding bankruptcy. In debt settlement, money is saved up in a protected account that stays under your control. The saved funds are used to pay off your creditors for less than you owe, after a reduced settlement is negotiated. This strategy can offer significant overall savings, a more affordable monthly payment, and a quicker way to becoming debt free, though it is not for everyone.
While your are working to build up money in your protected account, you choose to stop paying your current creditors. Consequently, debt collectors may call you, often quite aggressively, and there is a risk of legal action. Since you are missing payments, your credit score will be impaired for at least the duration of the debt settlement program, which typically runs between three and four years.
A good debt resolution firm will work hard to lessen these risks, but they are present until all your debts are settled. Debt settlement can be a great choice to resolve your debts at a low cost in a short amount of time while avoiding bankruptcy, but requires perseverance to be successful.
5. What is Cash Out Refinance Debt Consolidation?
Refinance loans as a consolidation solution involves taking additional cash out of your home equity to repay your debts. This is a solution that requires a new loan. Mortgage rates are still low, offering homeowners who have equity in their homes the chance to use their home to dramatically reduce monthly payments, and lower their interest rates. However, this strategy uses your home equity, putting your home at greater risk of foreclosure, if you experience debt problems in the future.
Your debt payments are also stretched across the life of the mortgage, meaning your debt is not repaid until your mortgage is paid off and your overall cost may be high.
Summary of Tips to Consolidate Debt
No matter what choice you make when deciding how to get your credit consolidated, we hope Bills.com can help point you in the right direction with sound advice and professional, pre-screened debt relief providers that have been pre-screened.