Consumer Debt Consolidation

Debt Consolidation can help your debt problems

Your financial situation is different from someone else. The debt relief service that works for someone may not be the best choice for someone else. You should take the time to understand all the debt relief options available to you to find the best solution for your needs and goals.


What Is Debt Consolidation?


Consumer Debt Consolidation (often referred to as debt management) is a process of combining your unsecured debts into a single, larger debt (loan) with a more favorable interest rate, payment terms and lower monthly payment.  Examples of unsecured debts that can be consolidated include credit cards, personal loans, medical bills and some types of student loans.   The goal of debt consolidation is to improve your financial situation by lowering your TOTAL costs of financing your debts.

Consumer debt consolidation simplifies loan repayment, offers a means of reducing your average interest on your unsecured debt, usually lowers your total debt costs and helps you get out of debt faster. There are many factors that come into play to get you the best possible average interest rate. These factors include the type of debt, your income,  credit score, payment discipline, and other factors.

Types Of Debt Consolidation

Credit card debt consolidation

Credit card debt is an unsecured personal loan from the credit card issuer. This type of debt has high interest rates, established credit limits and monthly payment obligations. Consumers often have multiple credit cards, with different terms. This is the primary type of debt to consolidate to manage and reduce your financial costs.

Credit card issuers offer consumers balance transfer cards with high credit limits to entice them to transfer and consolidate multiple credit card account balances. Normally these types of credit cards offer low introductory interest rates (often 0%) and can serve as an alternative to a traditional personal loan.

If you are able to pay down your credit card debt during the introductory period, you will be using a zero cost loan to pay off high interest debt, a big savings to you.

other non-secured debt consolidation

Personal loans, medical expenses and private student loans are the other major component of consumer unsecured debt. These types of debts will generally have lower interest rates than credit cards, but the payment obligations and fees will vary. This is the other type of debt to consolidate to manage and reduce your financial costs.

A traditional unsecured personal loan should be used for this type of debt consolidation. Various factors will determine the loan amount and interest rate, particularly your income and credit score. However, if the unsecured personal loan interest rate is not significantly lower than your existing debts, it may not be worthwhile to consolidate debts.

Note that balance transfer cards can also be used to consolidate some of these debts.

How Does Debt Consolidation Work?


Consumer debt consolidation is simple in principle. You borrow money and pay off your unsecured debt balances and remain with one, often larger debt, to pay off. Ideally, this single payment will have a lower interest rate than your unsecured debts, so you’d pay less in interest while paying down the debt. The main goal is to reduce or eliminate the interest rate applied to the balance. This makes it faster and easier to pay off credit card debt.

In many cases, you can get out of debt faster, even though you pay less each month. Debt consolidation essentially gives you a more efficient way to eliminate debt.

Debt Consolidation Options

Do IT YOURSELF

You apply for and take out new financing to pay off your existing unsecured debt balances. Basically this is new debt at a lower APR used to pay off old debt at a higher APR. Your goal is to pay off your unsecured debt faster by applying more of your payment to the principal balance, at a lower interest rate. There are two options:

A balance transfer credit card – Many lenders offer this type of credit card to consolidate unsecured debts. You use this type of card to consolidate your existing credit card balances to this new credit card.

These types of cards offer special “teaser” 0% APR introductory rates on balance transfers, giving you a limited time to pay off debt interest-free. At the end of the introductory period, the balance transfer credit card APR will increase and may be higher than what your are currently using.

You need to account for lender balance transfer fees when determining the total cost to cost of consolidating your credit card debt.

A debt consolidation loan – You take out an unsecured personal loan at a lower interest rate than your existing credit card debt. You use the funds from the loan to consolidate and pay off your existing credit card balances. This leaves only the low-interest loan to repay.

You need to account for lender loan origination fees when determining the total cost of consolidating your credit card debt.

Either financing option normally allows you to consolidate other non-secured debts besides your credit cards.

DEBT MANAGEMENT PROGRAM

A DMP is a debt consolidation program administered by a credit counseling agency.

The credit counselor will review with you which credit cards that you wish included. You will NOT have access to any credit card in the DMP. You might keep one credit card out for emergencies.

Based on your budget and debts, you and the credit counselor will determine a monthly payment amount.

Your credit counselor works with your credit card lenders to agree to participate and lower your debt costs (APR and late fees).

You make monthly deposits to the credit counseling agency

The credit counseling agency uses your deposits to pay your credit card lenders monthly.

Normally there is a set up fee and monthly fee for administration.

The basic benefits of a DMP include:

    • Reduce And Stop Debt Collector Calls
    • Potentially Lower Debt Interest Rates
    • Lower Monthly Payments
    • Waiver Of Late And Over Limit Creditor Fees
    • Potential Paying Off Your Debts Faster
    • Improving Your Credit Score By Making Consistent, On-Time Payments

Debt Consolidation Considerations


Is It Right For You?

Debt consolidation is not the same as debt reduction. The amount of unsecured debt being financed remains the same. It simply moves from several small to one large personal loan. It is a matter of how expensive (interest charges) it will be for you to pay off the debt. The debt still needs to be paid off. It didn’t just disappear.

Debt Consolidation will not eliminate your unsecured debts but will help you get them under control. It can be a successful debt relief option when:

    • Your unsecured credit card debts are at least $10,000 or greater.
    • You can consistently support the debt consolidation loan without resorting to new credit card purchases for your other monthly expenses.
    • The debt consolidation loan APR should be significantly less than your credit card accounts.
    • You have the discipline to not use credit cards until the debt consolidation loan is paid off.

Does It Affect My Credit?

Debt consolidation, when used properly, should improve your credit profile with time.

With the debt consolidation loan funds you will be paying off multiple unsecured debt accounts. This is positive for your credit profile.

The multiple unsecured debt accounts should be kept active rather than canceling them. Each of these unsecured debt accounts has an unused credit limit. The sum of these unused credit limits increases your total amount of available credit. This lowers your Credit Utilization ratio, where less than 30% is positive for your credit profile. You improve your “credit worthiness” as a consumer.

You need to be consistent in your payments of the debt consolidation loan, otherwise this will be negative for your credit profile.

As your unsecured debt account balances are paid off you should do a thorough review of your credit report to ensure that the accounts are probably updated. Delays and mistakes can happen

And finally you need to avoid the biggest mistake people make after consolidating unsecured debt like credit cards. That is, not stopping making new credit card charges.

Debt consolidation is to allow you to focus on eliminating, not adding to your unsecured debt.

Consumer debt consolidation can often help borrowers get out of debt faster than they otherwise would when dealing with multiple outstanding credit cards, loans, and other debts. Most borrowers obtain debt consolidation loans with much lower interest rates than those attached to their current outstanding debts. This helps lower the interest expenses they’re incurring each month, and it can help accelerate the payoff of outstanding debts.

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