What is Debt Consolidation?
Debt consolidation is a financial activity in which you merge all your existing debts into one credit card or a new loan. The term consolidation does not strictly mean merging your multiple credit accounts into one. Instead, you can also use the debt consolidation option to consolidate your debt from just one account.
The exact process of consolidating your credit card debt may vary depending on the path you take to do so. However, debt consolidation’s ultimate purpose is always to get a lower interest rate than what you are paying currently. So if you are struggling with different monthly payments, terms, and interest rates, your finances don’t allow you to pay off these debts. You may choose debt consolidation to roll off all your payments into a single monthly payment.
Ways to Consolidate Debt
There are several ways to consolidate your debt, such as personal loan, tap home equity, 401(k) loan, debt consolidation, or if the situation is too tricky, bankruptcy. Which one you choose depends on your financial circumstances. So thoroughly check the pros and cons of each strategy before making any decision. The most suitable debt consolidation program provides the following:
- Peace of mind
- Easy Program enrollment
- Lower interest rate
- A simple approach to pay off all of your debt in three to five years
- Minimal or no impact on your credit card
- Low or no fee
So let’s take a look at some of the best strategies to consolidate debt.
Balance Transfer Card
Also known as card refinancing, In this type, you transfer your credit card debt into a new balance transfer credit card to consolidate debt. This balance transfer card offers a zero interest rate for a promotional period, often 12 to 18 months. Consequently, you become able to make monthly payments without any interest rate for a limited time, helping you to balance your finance. But when that period ends, you have to pay a regular credit card interest rate. It would be best to have a good to excellent credit score to secure a balance transfer credit card.
Debt Consolidation Loans
You can get an unsecured personal from a credit union bank or an online lender to consolidate your debt. This type of loan often gives you a lower APR on your debt. Plus, they offer fixed interest rates which means your monthly payments remain the same throughout the loan period. However, some lenders charge an organization fee. If you have bad credit, it may become challenging for you to get a loan.
Home equity loan or line of Credit
If you are a homeowner, you can consolidate your debt by getting a loan against your home’s equity. This type of loan offers a comprehensively less interest rate because your home secures the loan. However, you can lose your home if you default on your repayments.
401 (K) Loan
Another critical alternate to consolidate your debt is to borrow up half of your retirement amount to repay your debt. But it is risky because if you default on your repayments, you may lose your job or quit. Plus, they also charge penalty fees and taxes on the unpaid balance. The only benefit is that it won’t affect your credit score.