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What is Debt Consolidation? and should I consolidate?
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What is Debt Consolidation? and should I consolidate?
Debt consolidation rolls multiple debts into a single payment. It can be a good idea if you have an interest rate at a lower level.
The article was written by Amrita Jayakumar Writer The Washington Post Amrita Jayakumar was a former special assignment writer for NerdWallet. She also published a syndicated article on money and millennials, and focused on personal loans as well as consumer credit as well as debt. Previously, she was a reporter for The Washington Post. Her work was published in The Miami Herald and USAToday. Amrita holds a master’s degree of journalism at the University ofMissouri.
Nov 30, 2022
Written by Kathy Hinson Lead Assigning Editor Personal finance, credit scoring, managing money and debt Kathy Hinson leads the core personal finance team at NerdWallet. In the past, she worked for 18 years with The Oregonian in Portland in capacities such as chief of the copy desk and team director of design and editing. Prior experience includes news and copy editing for various Southern California newspapers, including the Los Angeles Times. She graduated with a bachelor’s in journalism and mass communications at the University of Iowa.
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Debt consolidation rolls several debts, typically high interest debts, such as credit card balances in one payment. Debt consolidation might be the best option for you if it is possible to find a lower rate of interest. This will allow you to reduce your debt total and reorganize it so you are able to pay it off faster.
If you’re facing some debt that’s manageable and want to organize multiple bills with different interest rates, payment dates and due dates Debt consolidation is an effective strategy that you can take on your own.
The most important takeaways
How to consolidate your debt
There are two primary ways to consolidate debt both of which concentrate your debt payments into one bill each month.
Take a : Convert all of your debts to this card, and pay the balance in full during this promotional time. It is likely that you will need good or excellent credit (690 or greater) to be eligible.
Take advantage of a fixed-rate loan use the funds from the loan to pay off the debt, and then repay this loan in installments over the course of a specified time. You are eligible for an loan even if you have poor or fair credit (689 or less) however, those with higher scores will likely have the lowest interest rates.
Two additional ways to consolidate debt is borrowing a loan or . But both options come with the risk of losing your home or your retirement. In any case the best choice for you is based the credit scores and profile, as well as your personal situation .
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Debt consolidation calculator
Use the calculator to figure out whether it is logical to consolidate.
When debt consolidation is a smart move
A successful consolidation strategy is dependent on the following elements:
Your monthly payments to debt (including your mortgage or rent) aren’t more than 50% of your monthly gross income.
Your credit is strong enough to be eligible for credit cards with 0% interest period or a low-interest debt consolidation loan.
The cash flow you have is constantly covering payments toward your credit card.
If you decide to take a consolidation loan then you will be able to pay it off within five years.
This is a scenario where consolidation is logical: Let’s say you have four credit cards that offer rates of interest ranging between 18.99% to 24.99%. Your payments are always made punctually, so your credit is good. You may be eligible for a debt consolidation loan with a rate of 7%an incredibly low interest rate.
For many, consolidation offers a way to see the other end. If you choose to take out an loan with a term of three years you can be sure that it will be paid off in three years — assuming you make your payments on time and are careful with your spending. Conversely, making minimum payments on credit cards could mean some time before they’re paid off and you’ll be paying more interest than the initial principal.
Readers can also ask questions.
Is it an ideal idea to consolidate credit cards?
Consolidate your debt if you are able to obtain an loan with better terms, or it can help you to pay your bills on time. Just make sure this consolidating is part of bigger plan to get out of debt , and that you don’t rack up new balances on the cards you’ve consolidated. Find out more about .
What is a debt consolidation loan work?
A personal loan allows you to pay your debts yourself or use a lender that sends money straight towards your debtors. Learn about the steps to .
Do debt consolidation loans hurt your credit?
Consolidation of debt can improve your credit if you make on-time payments or consolidating reduces your balances on credit cards. Your credit may be hurt if you run up the balance on your credit card, close most or all of your other cards or miss a payment on you credit consolidation loan. Find out more about .
If debt consolidation isn’t worth it, then don’t do it.
Consolidation isn’t a silver bullet for debt problems. It doesn’t address excessive spending habits that lead to debt in the first place. It’s also not the solution when you’re not in any hope of paying it off even by making smaller payment.
If your debt burden isn’t too heavy, you can pay it off within six months to a year , at your current rate and you’d save just a negligible amount in the process of consolidating, you shouldn’t be concerned.
Consider a DIY debt-payoff method instead, such as the or . You can make use of a to test out the various options.
If the total of your debts is greater than half of your income, and the calculator above shows that debt consolidation is not your best option, you’re better off than treading water.
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About the author: Amrita Jayakumar is a former writer at NerdWallet. She previously worked at The Washington Post and the Miami Herald.
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