Consolidate Debt & Credit

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What is Debt Consolidation?
HIGHLIGHTS
  • There are 5 main ways to consolidate debt.
  • Prioritize your goals before consolidating debt.
  • Shop around for the best debt consolidation provider before consolidating credit.

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;

  1. Improve Your Cash Flow: Reducing the size of your monthly payments frees up money you can use in a variety of ways.
  2. 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.
  3. Protect Your Credit: You may need to weigh if it is worth harming your credit, in order to get out of debt faster.
  4. 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.
  5. 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.
Quick tip #1: We have screened debt relief providers who can help you consolidate debt by getting a debt consolidation quote.

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

Quick tip #2: Check out our free DebtCoach tool. It helps you evaluate your situation and recommends a solution based on the goals you specify.

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.

Bills.com also features many debt consolidation videos and other tools and calculators that help explain the difference between the various options available.

Consolidating Student Loans

Bills.com also offers information about how to consolidate federal student loans and private student loans.

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Comments (56)


Vernito D.
September 09, 2013
This is very helpful. Thanks!
Meredith W.
Boston, MA  |  November 02, 2012
Thank you, some good tips on consolidating tips. The video was helpful for me.
Esther G.
Chicago, IL  |  February 06, 2012
How to consolidate debt the best way for someone with lots of debt, no home to refinance, and bad credit? I really need to figure out how to consolidate my debts this year.
Reade P.
Menlo Park, CA  |  July 13, 2011
If i consolidate debt is that the same on my credit report as filing bankruptcy?
Bills.com
July 14, 2011
Bankruptcy is unique. It shows on your credit report that you filed for bankruptcy for as long as 10 years.

Consolidating debt can be done in different ways, each with different effects on your credit. In the debt relief industry, debt consolidation can mean a loan that consolidates your debt, credit counseling, or debt settlement. To help you choose what option is best for you, use the free Bills.com Debt Coach tool.
Mark K.
April 11, 2011
These guys are good, I have a link to them on my page. My tips are to just take care of the debts with the highest interest rate -- that way you can have control of which creditors actually move down and which don't.
John K.
New Market, MN  |  February 16, 2011
What factors would you consider if trying to decide between a cash-out refi and a 0% balance transfer offer to consolidate debt? I have about $25,000 in credit debt and my credit rating is excellent.
Bills.com
February 16, 2011
I need to know more about your overall finances, before I could offer you a firm recommendation about the best way to consolidate debt.
Here are some factors I would consider:
  • How long does the 0% interest rate remain in effect?
  • Do you think you can pay off the entire $25,000 before the 0% rate expires?
  • What is the default interest rate, if you miss a payment and the 0% interest rate goes away?
  • What is your current mortgage interest rate?
  • What interest rate are you being offered for a new mortgage?
  • Are you seeking to consolidate debt other than the $25,000 debt you mentioned?


These are not all the questions I would consider, but it gives you a few items to chew over. I hope that this helps you in your quest to consolidate debt.
Rob S.
Homewood, IL  |  February 07, 2011
Great video. Very informative.
Fernando P.
Daly City, CA  |  February 07, 2011
Can debt resolution options be used if you have had a recent bankruptcy, but have incurred more credit card debt after?
Bills.com
February 07, 2011
Yes, there may be another debt resolution option that can help you, even if you have a recent bankruptcy. You did not specify if you filed for Chapter 7 or for Chapter 13 bankruptcy. It makes a difference what kind of bankruptcy you completed, when looking at your current options. If you have high interest rates on your credit cards, then a Credit Counseling program could be your best option, provided you can afford the program's monthly payments. You are NOT restricted from entering a credit counseling program regardless of the type of bankruptcy you filed, although you cannot be enrolled in a credit counseling program while your bankruptcy case is active.

Debt settlement programs usually will NOT enroll a client who has had a Chapter 7 Bankruptcy discharge within the past three years. There are no restrictions on entering a debt settlement program after a Chapter 13 bankruptcy discharges.

Aside from taking care of debt you have incurred, I recommend that you do some general financial planning. If you are incurring sizable debt after finishing a bankruptcy, then you need to adjust your spending and resource allocation. I suggest that you start making a budget.
John B.
Phoenix, AZ  |  February 06, 2011
So Debt Consolidation is just a catch-all phrase. If you can't get a loan, and you don't want to go bankrupt, what debt consolidation options are available?
Bills.com
February 07, 2011
There are a couple of options for debt relief, if you can't qualify for a loan to consolidate debt and you wish to avoid filing for bankruptcy.

You should look into a debt settlement program and a credit counseling program. In a Credit Card Counseling program, your credit card issuers agree to lower your interest rate in exchange for the promise of repaying the entire balance in five years.

In a debt settlement program, you choose to cease making monthly payments to your unsecured creditors, instead placing funds each month in a special account that stays under your control. Your settlement program negotiates reduced pay-offs with your creditors and the funds in your special purpose account are used to pay the settlements.

I recommend that you visit the bills.com savings center. There, you can get free consultations and debt relief quotes to see what your options are and how much you could save from one of Bills.com's pre-screened debt relief providers.
Tina P.
Pacific Grove, CA  |  February 05, 2011
I didn't realize there were so many options to consolidate debt until reading the information on this page. And you make it easy to understand the variety options to get out of debt.
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