How Do I Make the Right Choice, When I Need to Consolidate My Debt?
Carrying debt can be very stressful. Depending on your financial situation, you may be under high pressure, medium pressure, or low pressure. If you are drowning in debt, you're obviously under a lot of pressure. If you are making your monthly payments each month, but your debts are growing, you are also under pressure, even if the pressure is less intense.
Consolidating your debts into one monthly payment may be a solution that can reduce the pressure you're under, save you money, and help you get out of debt faster. Everyone's financial situation is different, but there are some basic questions anyone considering consolidation should ask:
- Do I need to consolidate my debt?
- How will consolidation affect my monthly payment and overall costs?
- How will consolidation affect my credit?
Sometimes, the answer to the question, "Do I need to consolidate my debt?" is "No. I want to consolidate my debt, but I don't need to." You have good income and strong credit, but have some debts you want to consolidate to pay off more effectively. If you are in this low-pressure situation, consolidating debt can improve an already stable financial situation.
You can save money when you consolidate your debt into a lower interest rate loan. When interest rates are low, it is a great time to take advantage of the opportunity to save money and reduce the pressure.
If you are in the low-pressure category, look into the following options:
- Balance Transfer- Move any credit card debt you have onto a card with a lower interest rate. If you shop around, you can find a 0% or very low interest rate card. The low rates last only a limited time. To save money, you either have to keep transferring your remaining balances to other cards or pay the debts off during the low interest period. Pay attention to your credit utilization on the card you use for transfers. If you are eating up more than 35% of the credit limit you're granted, you could harm your credit score.
- Cash-out Mortgage Refinance- Most lenders cap cash-out loans at 85% of your home's appraised value, so you need a strong equity position to even consider a cash-out refi as a debt consolidation solution. If you do have the equity, income, and credit to qualify, there isn't a cheaper way to finance debt over a long period of time. Your monthly payments will drop, but your overall costs can increase if you turn a debt that would be paid off in a few years into one that you pay interest on for 30 years. Your credit will improve if you pay off all your credit cards in a refinance, as long as you don't run up debts on your accounts again.
Small financial changes can cause increased pressure. There are many possible reasons for pressure to ramp up, including:
- Loss of income
- A large, unexpected expense
- A missed credit card payment that results in a huge increase rate hike
When these kinds of events take place, it may not be possible to handle your problem on your own. While you may be able to make your monthly payments, using a professional debt consolidation service can help you save money and become debt-free sooner. You should look into the services of a Consumer Credit Counseling Service (CCCS).
As a first step, a CCCS works with you to review your overall financial picture, helping you establish a budget. They will analyze your income, spending habits, the debt you accrued, who you owe, and the assets you own. If your credit card interest rates are high, the CCCS will recommend a Debt Management Plan (DMP), where it can reduce your rates and help you get out of debt in about five years. You consolidate all of our credit card accounts into the DMP and make one monthly program payment.
Your DMP monthly payment may be smaller than your current monthly payments, but it usually is not much smaller. A DMP does not lower your credit score, but it harms your credit profile. The notation on your credit report that your accounts are enrolled in a DMP is viewed unfavorably by lenders. Essentially, you should not plan to open new credit accounts while in the DMP. Expect to pay high interest on any loan you need to take out, like a car loan.
Many Americans are under a lot of financial pressure. Housing prices have plummeted, unemployment has risen, and the cost of living keeps going up. If you're under high pressure, it may not be possible for you to pay all your bills on time. If you miss a payment with one creditor and it hikes your interest rate, you may be able to work your way out of your problem. If you miss payments with multiple creditors and all your rates get hiked, it is extremely difficult to dig yourself out of the hole. At that point, unless you can significantly increase the size of your monthly debt payments, the bulk of your payment will go to interest. You'll start getting collection calls, letters, and threats. The pressure builds and builds and it is very hard to know what to do.
If you are experiencing extreme financial stress, you need to look into programs that offer more aggressive solutions.
- Debt Settlement- A debt settlement program has the lowest monthly and overall costs of any debt consolidation program, other than bankruptcy. A high-quality debt settlement firm will not charge you any up-front fees. You only pay a fee for any account you enroll after the account is settled. Without results, the settlement firm will not earn any money. Settling your accounts and saving you money will reduce the pressure you feel. However, debt settlement will strongly harm your credit. Unless you are sure that saving money is more important to you than the impact on your credit, don't choose debt settlement.
- Bankruptcy- Filing bankruptcy is the most severe solution that you can put in place, but it is the best choice in some cases. If you qualify for a chapter 7 bankruptcy, which is hard to do, you may be eligible to discharge all of your debts, saving you the most money. Chapter 7 bankruptcy may require you to liquidate assets you owe and it causes major harm to your credit, but it can give you a fresh start and release all the pressure you're under. When you're under heavy pressure, a free consultation with a bankruptcy attorney is a good way to help you clarify your options.