Consumer Debt Consolidation

Debt Consolidation can help your debt problems

Your financial situation is different from anyone else. You should take the time to understand all the available consumer debt relief options 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.

Credit Card 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.


Non-Secured Debt Consolidation

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.

Do It Yourself

You apply for and take out new financing to pay off your existing credit card 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 credit card debt faster by applying more of your payment to the principal balance, at a lower interest rate. There are two options available to you.

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

The Debt Management Program is a central fund administered by the credit counseling agency.

The credit counselor will review with you which non-secured debts, like your credit cards, medical bills, and personal loans 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 lenders to agree to participate and lower your debt costs (APR and late fees).

You make monthly deposits to the credit counseling agency.

The consumer debt counseling agency uses your deposits to pay your creditors monthly.

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

The basic benefits of a Debt Management Program 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

Considerations

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.

Most Americans carry an excessive amount of credit card debt. While convenient as a form of payment, it is an expensive type of debt to use and requires financial discipline. Many lack this.

Debt consolidation is not the same as debt reduction. The amount of credit card 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.

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

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

The multiple credit card accounts should be kept active rather than canceling them. Each of these credit card 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 credit card 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 credit card debt. That is, not stopping making new credit card charges.

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

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Frequently Asked Questions

Consumer Credit Score

Credit scores for married couples are treated separately. They do not have joint credit scores. Each has their own individual scores. If you are unmarried you only need to worry about your credit habits and profile. However, if you are married your spouse’s credit habits and profile have an impact on yours. For example, if you have a credit card in both of your names and it does not get paid on time, that can adversely affect both of your credit scores.

A credit score minimum requirements, in order to qualify to receive one, your credit report must have:

  • At least one account opened for six months or more;
  • At least one account reported to the credit bureau within the past six months
  • No indication of deceased on the credit report

Credit score changes, in general, do not change that much over time. Your credit score is calculated each time it is requested;. This can be a lender request or by you. Each time your credit score is calculated it takes into consideration the information that is on your credit report at that time. As the the information on your credit report changes, your credit score can also change.

There can be delays by your creditors in reporting information to the credit bureaus. Also, the type of changes in information will affect your credit score. For example, opening a new credit card account will be more significant a change than simply having paid your bills on time the previous month. Also, something dramatic like a bankruptcy judgement will have a significant impact in the calculation of your credit score.

Credit scores are different between the national credit bureaus. In the U.S., the three national credit bureaus compete to capture, update and store credit histories on most U.S. consumers. While most of the information collected by the three credit bureaus is similar, there are differences.

All of your credit information may not be reported to all three credit bureaus. The information on your credit report is supplied by lenders, collection agencies and court records. You should not assume that each credit bureau has the same information pertaining to your credit history.

A bankruptcy affects credit scores negatively. It will always be considered a very negative event by your credit score. The negative impact it will have on your score will depend on your entire credit profile. For example, someone with a high credit score could expect a huge drop. Alternatively, someone with many negative items already listed on their credit report might only see a modest drop in their score. Also, the more accounts included in the bankruptcy filing, the more of an impact on your credit score.

Does spending less improve credit scores? It depends. If the money saved goes into your bank account, this will not improve your credit scores. Your credit scores do not consider the amount of disposable cash you have at any given time.

However, if the money saved is used to consistently payoff your credit accounts, you will notice an improvement in your credit score. Your credit score factors in the balance on your revolving credit accounts such as your credit cards. As you pay the balances down, your debt versus credit (credit utilization ratio) should decline, which is positive for your credit scores.

Do inquires affect credit scores? Yes they do. Credit inquiries are requests by a “legitimate business” to check your credit. These inquires are reported to the credit bureaus which are then included in your credit reports. There are two types of credit inquiries that are classified as either “hard inquiries” or “soft inquiries.” Only hard inquiries have an affect on your credit scores.

Soft inquiries are all credit inquiries where your credit is NOT being reviewed by a prospective lender. These include inquiries when you are checking your own credit reports and credit checks made by businesses to offer you goods or services.

Hard inquiries are credit inquiries where a potential lender is reviewing your credit because you have applied for credit with them. For example, when you have applied for an auto loan, mortgage or credit card. Each of these types of credit checks count as a single credit inquiry. The exception is when you are “rate shopping” for the best deal on a loan. In this case all all inquiries within a 45-day period for a mortgage, an auto loan or a student loan are classified as a single credit inquiry.

Most likely your credit report has errors.

The Federal Trade Commission reported in a study conducted in 2012 that 26% of the credit reports they analyzed had errors. Of those with errors, 5% who disputed these errors increased their credit scores at least 25 points. That is a significant change in a credit score.

You should not assume that your credit reports are completely accurate.

No. Your credit report is independent of your spouse. The same is true of your credit scores. However…

A lender will likely take into consideration both of your credit reports when deciding on a home mortgage, for example. If your credit report is bad and your spouse’s good you may find that the loan, if approved, has a higher interest rate than if both were good.

It certainly can. Many employers will do a credit check of a potential employee to determine the stability of the job candidate. For job positions that entail financial responsibility, it is most likely you would experience a credit report check.

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Consumer Credit Score

Credit scores for married couples are treated separately. They do not have joint credit scores. Each has their own individual scores. If you are unmarried you only need to worry about your credit habits and profile. However, if you are married your spouse’s credit habits and profile have an impact on yours. For example, if you have a credit card in both of your names and it does not get paid on time, that can adversely affect both of your credit scores.

A credit score minimum requirements, in order to qualify to receive one, your credit report must have:

  • At least one account opened for six months or more;
  • At least one account reported to the credit bureau within the past six months
  • No indication of deceased on the credit report

Credit score changes, in general, do not change that much over time. Your credit score is calculated each time it is requested;. This can be a lender request or by you. Each time your credit score is calculated it takes into consideration the information that is on your credit report at that time. As the the information on your credit report changes, your credit score can also change.

There can be delays by your creditors in reporting information to the credit bureaus. Also, the type of changes in information will affect your credit score. For example, opening a new credit card account will be more significant a change than simply having paid your bills on time the previous month. Also, something dramatic like a bankruptcy judgement will have a significant impact in the calculation of your credit score.

Credit scores are different between the national credit bureaus. In the U.S., the three national credit bureaus compete to capture, update and store credit histories on most U.S. consumers. While most of the information collected by the three credit bureaus is similar, there are differences.

All of your credit information may not be reported to all three credit bureaus. The information on your credit report is supplied by lenders, collection agencies and court records. You should not assume that each credit bureau has the same information pertaining to your credit history.

A bankruptcy affects credit scores negatively. It will always be considered a very negative event by your credit score. The negative impact it will have on your score will depend on your entire credit profile. For example, someone with a high credit score could expect a huge drop. Alternatively, someone with many negative items already listed on their credit report might only see a modest drop in their score. Also, the more accounts included in the bankruptcy filing, the more of an impact on your credit score.

Does spending less improve credit scores? It depends. If the money saved goes into your bank account, this will not improve your credit scores. Your credit scores do not consider the amount of disposable cash you have at any given time.

However, if the money saved is used to consistently payoff your credit accounts, you will notice an improvement in your credit score. Your credit score factors in the balance on your revolving credit accounts such as your credit cards. As you pay the balances down, your debt versus credit (credit utilization ratio) should decline, which is positive for your credit scores.

Do inquires affect credit scores? Yes they do. Credit inquiries are requests by a “legitimate business” to check your credit. These inquires are reported to the credit bureaus which are then included in your credit reports. There are two types of credit inquiries that are classified as either “hard inquiries” or “soft inquiries.” Only hard inquiries have an affect on your credit scores.

Soft inquiries are all credit inquiries where your credit is NOT being reviewed by a prospective lender. These include inquiries when you are checking your own credit reports and credit checks made by businesses to offer you goods or services.

Hard inquiries are credit inquiries where a potential lender is reviewing your credit because you have applied for credit with them. For example, when you have applied for an auto loan, mortgage or credit card. Each of these types of credit checks count as a single credit inquiry. The exception is when you are “rate shopping” for the best deal on a loan. In this case all all inquiries within a 45-day period for a mortgage, an auto loan or a student loan are classified as a single credit inquiry.

Most likely your credit report has errors.

The Federal Trade Commission reported in a study conducted in 2012 that 26% of the credit reports they analyzed had errors. Of those with errors, 5% who disputed these errors increased their credit scores at least 25 points. That is a significant change in a credit score.

You should not assume that your credit reports are completely accurate.

No. Your credit report is independent of your spouse. The same is true of your credit scores. However…

A lender will likely take into consideration both of your credit reports when deciding on a home mortgage, for example. If your credit report is bad and your spouse’s good you may find that the loan, if approved, has a higher interest rate than if both were good.

It certainly can. Many employers will do a credit check of a potential employee to determine the stability of the job candidate. For job positions that entail financial responsibility, it is most likely you would experience a credit report check.

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