If you feel like your debts are becoming too much to handle, it might be time to consider debt consolidation. Debt consolidation can give you some relief from the stress of dealing with debt, missed payments, and late fees.
Most people have some type of debt, whether it's credit cards, car or student loan, or mortgage. It's very normal to have debt. Total U.S. Household Debt is $14 trillion and rising.
It’s easy to feel overwhelmed by debt, especially if you owe multiple balances to different creditors, all at different rates. It can be stressful and confusing to have so many different types of debt to keep track of.
After all, being late or missing a payment can result in late fees and a lowering of your credit score.
The good news is that there are ways to set yourself free from personal debt. One of these methods is debt consolidation. You're about to discover everything you need to know about debt consolidation and how you can benefit from it.
What is Debt Consolidation?
Debt consolidation is a process that involves the combination of debts from several creditors into one account. Once your debt has been consolidated, you can then take on one major debt in the form of a loan to pay everything off.
The simple explanation is that you're combining all of your debts and then making one payment to pay them all down.
Top Five Ways to Consolidate Your Debt
- Independent Debt Consolidation Service
- Debt Consolidation Loan
- Home Equity Loan
- Transfer Balances to a Low Interest Rate Credit Card
- Borrow from Retirement Savings (IRA)
Debt consolidation is often done for convenience because it allows you to fully focus on only one debt repayment. At the same time, it also helps lower the overall interest rates of the payments involved and reduce the payments that need to be made at specific agreed-upon intervals.
Debt consolidation works best for high interest rate debt, like high interest credit cards. Debt consolidation helps you pay them off and pay off a debt with a lower interest rate. This can save you hundreds or thousands of dollars in interest.
Types of Debt Consolidation
Debt consolidation loans are often seen as the best way to consolidate all of your existing debt into one repayment. However, while this is the main type of debt consolidation, it's not the only option to consider. There are other options for debt consolidation that might suit you better depending on your individual circumstances.
Work with a Credit Counselor
You can contact debt consolidation companies and get in touch with a credit counselor. A credit counselor is an individual that works in an accredited counseling agency to help individual debtors manage and settle their debts. This can be done by educating them about their debt so they can stop racking up more of it. Through this type of credit counseling, individuals avoid bankruptcy and living paycheck to paycheck.
Credit counselors can also act on behalf of a debtor in negotiations with a creditor when the individual is unable to pay the debt. If you're frustrated and confused about what to do about your debt, a credit counselor can be a trusted advisor to guide you in the right direction.
How to Get Started with a Credit Counselor
The first thing you have to do is identify a good, reputable credit counselor. A counselor's reputation can easily be seen by looking at the company’s online reviews.
Next, you have to confirm that the agency you choose is fully licensed by relevant regulatory bodies. If you're unsure of an agency's credentials, make sure to ask them if they're licensed to offer their services in your state.
Finally, you'll want to check with your state's Attorney General and consumer protection agency to make sure that the credit counseling agency has a low number of complaints. It takes a bit of time and effort, but finding a good credit counselor can be the difference between worrying endlessly about your debts or feeling confident in your new plan to pay them off.
Take out a personal loan
As mentioned earlier, debt consolidation involves taking a single large debt to repay several smaller ones. One way to do this is by taking out a personal loan.
How to get started
Using a personal loan as a debt consolidation loan is exactly what it sounds like; you borrow a large amount of money against your bank balance to settle the debts you owe.
The loan is often unsecured and the periods of repayment are made definite. We recommend a few companies for debt consolidation loans:
There are various options to explore under this:
- Home equity loans: Since the new debt requires collateral, home equity loans allow you to take out a loan that is secured by the value of your home. I have used this method to pay off my student loans & then, used the extra money to pay off my home.
- Credit card debt balance transfers: This type of debt consolidation involves the transfer of the debts owed to several credit cards to one that has a lower interest.
- Personal loan: This is a loan taken against your personal bank account balance or history.
How to Use Debt Consolidation Effectively
The most important thing you have to do is seek professional help when it comes to selecting the best approach to debt consolidation from the options you have. You also have to have a good understanding of the reasons behind your financial distress.
Finally, make comparisons between your current repayment rates and interests versus the new interest rates. There is no point in getting your debt consolidated if it will be cheaper to keep repaying it within your current plan.
Once selected, you have to approach debt consolidation with a lot of monetary discipline. Stick to the plan drawn up by your credit counselors. Budget all your expenses and set standards for your spending. You do not want to end up in a worse situation than before.
Debt Consolidation Costs
Debt consolidation should be effected according to your personal financial situation and the type of debt consolidation. Just keep in mind that if the services of a credit counselor are procured, there will be monthly management fees for the credit counseling agency. This will vary from agency to agency but are often not expensive.
Alternatives to Debt Consolidation
The best alternative to debt consolidation is debt settlement. It is a great alternative, especially for debtors with poor credit scores, because it involves direct negotiations with creditors.
Usually, these negotiations will center on reducing the entire debt amount. However, the main downside to this is that the time limit for the debt repayment will be significantly reduced. Often, the creditor may require the lump sum payment upfront.
Am I a Good Candidate for Debt Consolidation?
To find out whether or not you are a good candidate for debt consolidation, your credit counselor will first have to check your payment history and credit report. This insight into your finances allows them to ensure the risk of default is minimized, helping you qualify for these debt relief measures.
How to Improve Your Credit Score in 30 days
If you find yourself in a situation where your credit score is damaged, don't fret. There are certain steps you can take to help to repair and rebuild your credit score – but in any case, the first thing you’ll want to do is assess the damage.
How to Obtain a Free Credit Report
Your credit report contains information that measures your creditworthiness, including your resident and resident history, your debt repayment history, and any cases of debt default wherever they apply.
We use and recommend Annual Credit Report to get your free credit report. They claim to be the only service authorized by Federal Law.
You can also get your credit report for free once a year from any credit bureau. These are your online shortcuts to each bureau's “Free Credit Report” link.
They won't ask you for a “credit card”. They make their money by providing additional services like credit monitoring and ID theft protection.
How to Read a Free Credit Report
A credit report contains a lot of information. From the day you opened a credit account or took out any loans, to your debt repayment history, to all outstanding balances on the different accounts you have. It will also assign you a score based on your ability to repay your debts on time.
What is a Good Credit Score?
Created by the Fair Isaacs Corporation (FICO), credit scores are awarded based on your credit history. They range from 300 to 800, with low scores being poor and the highest scores being very good. A good credit score starts from 670. Click here for the fastest way to get a credit score of 800.
What factors increase your credit score?
Paying bills and debts on time is the best way to increase your credit score. Other methods include having active credit accounts that are also paid on time and having a low credit utilization ratio. This is measured by adding your credit card balances and dividing the amount by your total credit limit.
What factors decrease your credit score?
The main thing that will reduce your credit is the defaulting of accounts. This happens when you miss payments.
Also, if you have a high credit utilization, typically above 30%, it means you are using too much available credit. This may lower your score. You should also avoid applying for too much credit at the same time.
Four Instant Ways to Improve Your Credit Score
Correct Any Errors
Credit report errors are the main complaints received by credit report regulating authorities. This type of error involves mistaken identities, double reporting of accounts, and bad debts not written off despite the time-lapse.
These mistakes should be identified and rectified quickly. You should contact the credit bureau and the organizations that forwarded the information. Here's a dispute letter template that you can send to the credit bureaus. You can mail them to the address and phone number of the credit bureaus here.
This can be done online through platforms provided by the firms. Unless the dispute is considered as frivolous, the credit bureau should settle it within 30 days. Include certified copies that support your claims.
Adding Authorized Users to Credit Cards
Adding another person to a transacting account can also improve your score. The individual will receive a credit card tied to the account.
Remember to report the authorized user to the credit bureau for them to update your credit report. If repayments are made on time and expenses are kept within the limit, the overall credit score will improve quickly.
Raise Your Available Credit
Apply for a new credit that will have a higher limit. The credit report will calculate your debt to limit ratio. This is the amount you owe on the credit card divided by the credit card limit. You want to aim for this percentage to be under 30%.
Negotiate to Remove Blemishes
This can be done in one of two ways. You can enter a pay-for-delete negotiation with your creditor, where you offer to pay the amount owed in delinquent or past-due accounts in exchange for them removing the negative details from your credit report.
There are credit repair companies that we work with that will do all the work for you. They analyze your credit report & write letters on your behalf. We recommend:
The second way is making a goodwill deletion request. You can do this when you have already paid the account.
Five Factors that Raise Your Credit Score Fast
Now that you know the steps to take to rebuild your credit score fast, it's important to also consider the different factors involved. The following will have a major impact in boosting your score:
- Credit Payment History
- Credit Utilization
- Length of Time for Open Accounts
- New Credit Accounts
- New Credit Inquiries
Credit Payment History
This shows how you have paid your accounts since receiving the credit. It's important to always make payments on time, but if you miss a payment due date, but according to Experian, it won't show up on your credit report or impact your credit score.
If you miss one payment, then this will affect higher credit scores. A 30 day delinquency will cause a 90 to 110 point drop on a FICO score of 780 for a consumer who has never missed a payment.
Length of Credit History
The longer your credit history, the more ‘creditworthy' you are. The key to this is ensuring the payment history is impeccable.
New Credit Accounts
If approved, new credit accounts attest to the reliability of the individual to bear the risks involved with borrowing money.
New Credit Inquiries
Credit card inquiries involve the background checks of your past credit history.
Two types of inquiries exist: soft and hard inquiry. A hard inquiry occurs when a lender reviews your credit report to make a decision on a loan or credit card. A soft inquiry is done without your knowledge when a credit card company sends you an offer in the mail. Those “pre-approved” letters were sent using a soft inquiry to see if you're qualified.
While soft inquiries typically have no effect on your credit score, you should avoid hard inquiries by minimizing applying for credit cards.
Credit Accounts in Use
Always ensure the credit accounts are active and payments made to them on time. This will raise your credit score fast.
Frequently Asked Questions About Debt Consolidation
Most people accumulate credit card debts or other types of debt way too fast without a clear way of repaying them. When you notice that you are late on your debt payments and other options are closed to you, it may be time to use debt counseling experts.
While repaying debt through a debt management plan may reflect on your payment history, it will not alter your credit score.
Whether debt consolidation is a good idea or nott depends on personal circumstances. If you are consolidating multiple high-interest debts into one manageable repayment, then yes, it can be a smart option.
A credit score is a numerical rating that represents your creditworthiness, and it is used by lenders and other financial institutions to evaluate your ability to repay a loan or credit card debt. The most widely used credit scoring model in the United States is the FICO score, which is based on five key factors:
Payment history: This factor accounts for 35% of your FICO score and looks at whether you have made your payments on time. Late or missed payments can have a negative impact on your credit score.
Credit utilization: This factor accounts for 30% of your FICO score and looks at how much of your available credit you are using. High credit utilization (using a large percentage of your available credit) can indicate that you may be overextended and may be more likely to miss payments.
Length of credit history: This factor accounts for 15% of your FICO score and looks at how long you have had credit accounts. A longer credit history can indicate that you are a responsible borrower and may be more likely to repay your debts.
Credit mix: This factor accounts for 10% of your FICO score and looks at the different types of credit accounts you have, such as credit cards, loans, and mortgages. Having a mix of different types of credit accounts can indicate that you are capable of managing multiple forms of credit.
New credit: This factor accounts for 10% of your FICO score and looks at how many new credit accounts you have recently opened or applied for. Opening too many new credit accounts in a short period of time can indicate that you are overextending yourself and may be more likely to miss payments.
It's important to note that the above factors and their weighting may be different for other models of credit scoring.