Is Debt Consolidation Right for Me?

If you have outstanding debt, you may have heard of debt consolidation. Designed to take multiple debts and roll them into a single, manageable monthly payment, debt consolidation can help people save money on interest and pay their debt off faster. It’s not right for everyone, though. Here’s what you need to know.

How Debt Consolidation Works

Say you have three credit cards. Each has a different high interest rate and a separate monthly payment. Each month, you make the minimum payments on each card, but you notice that you’re not making much progress. What are your options? If you have a manageable amount of debt and want to restructure it, debt consolidation may be worth considering.

Because debt consolidation takes multiple forms of debt with varying interest rates, due dates, and payments and rolls them into a single package, it’s an excellent option for people who want to reduce their overall debt burden and work smarter (not harder) to pay it off.

Popular Debt Consolidation Methods

When it comes to consolidating debt, there are two standard methods people can choose from. Both debt consolidation method work to concentrate debt payments and offer a single monthly bill:

  • Open a 0% Interest Card. If the debt load is minimal, one of the fastest ways to pay it off can be to open a 0% interest, balance-transfer credit card. Once you’ve opened the card, you can transfer your debt onto the card and pay the full balance before the promotional period ends. If you’re going to take this option, though, be aware of balance transfer fees. Save yourself money by getting a card with no balance transfer fee.
  • Get a Personal Loan. If you have a more substantial amount of debt, you can look into getting a personal debt consolidation loan. These loans typically offer low, fixed rates, and can help you get a handle on your debt.

If you own a home, you can also look into a home equity loan or 401(k) loan to help you consolidate your debt. These options should be used as a last resort, however, since they involve risk to your investments, namely retirement and your home. If you’re interested in taking one of these options, consult with a financial planner first.

When Debt Consolidation is Right for You

While debt consolidation can be a good option, it’s not right for everyone. Here are a few indications that you’re a good candidate for consolidation:

  • Your total debt load isn’t over 40% of your gross income. If you have a higher debt load than this, you may want to explore other repayment options.
  • You can get a 0% interest card. If your credit is not good enough to qualify for a 0% card or low-interest loan, you may pay more throughout your loan in interest.
  • You are confident you will not run up debt again. If you consolidate credit card debt only to run up credit card debt again, you’ll have two high payments to deal with. Don’t consolidate unless you’re confident you won’t do this.

If you meet the above criteria, debt consolidation may be an excellent option for you. Enjoy your newfound life of financial freedom!

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