What is Debt Consolidation?
Debt consolidation is combining several unsecured debts — credit cards, medical bills, personal loans, payday loans, etc. — into one bill and paying all of them with a single loan. Instead of having to write checks to 5–10 creditors every month, you consolidate bills into one payment, and write one check. This helps eliminate mistakes that result in penalties like incorrect amount or late payments.
There are three major types of debt consolidation: Debt Management Plans, Debt Consolidation Loans and Debt Settlement. These are not quick fixes, but rather long-term financial strategies to help you get out of debt. When done correctly, debt consolidation can:
- Lower your interest rates
- Lower your monthly payments
- Protect your credit score
- Help you get out of debt faster
What Is The Best Way to Consolidate Debt?
There are several ways to consolidate debt, depending on how much you owe. The best way to consolidate credit card debt under $3, 000 could be to get a zero-percent interest credit card and transfer balances from high-interest credit cards over to it. You also could look at a personal loan to pay off your balances. You could get a home equity line of credit, a home equity loan or a second mortgage on your home, or refinance your existing mortgage.
Other options include borrowing against a whole life insurance policy and borrowing against you retirement savings. The best way to consolidate a large amount of credit card debt (anything over $3, 000) without taking on a new loan, is to enroll in a Debt Management Plan.
Most financial experts agree that a Debt Management Plan (DMP) is the preferred method of debt consolidation. The most-recommended DMPs are run by non-profit organizations. They start with a credit counseling session to help determine how much money you can afford to pay creditors each month. The non-profit agency can help you get a lower interest rate from creditors and reduce or waive late fees to help make your monthly payment affordable. You send one payment to the agency running the DMP and they split it among all your creditors. Utilizing a debt management plan could affect your credit score. However, at the end of the 3-to-5 year process, you should be debt free, which definitely improves your score.Learn More About Management Plans
A Debt Consolidation Loan (DCL) allows you to make one payment to one lender in place of multiple payments to multiple creditors. A debt consolidation loan should have a fixed interest rate that is lower than what you were paying, which reduce your monthly payments and make it easier to repay the debts. There are several types of DCLs, including home equity loans, zero-interest balance transfers on credit cards, personal loans, and consolidating student loans. It is a popular way to bundle a variety of bills into one payment that makes it easier to track your finances. There are some drawbacks — you could face a longer repayment period before you finish paying off the debt — but it’s definitely worth investigating.Learn More About Consolidation Loans
What Is Bill Consolidation?
Bill consolidation is an option to eliminate debt by combining all your bills and paying them off with one loan. With bill consolidation, you make only one monthly payment — a good idea for when you have five, or maybe even 10 separate payments for credit cards, utilities, phone service, etc. If you consolidate all bills into one, the single payment should be at a lower interest rate and reduced monthly payment. Any savings could be used to start an emergency fund to help prevent a future financial crisis.