Is Debt Consolidation Right For You? Here’s How To Find Out:
Having multiple sources of debt can make you feel like you’re being pulled in several different directions at once, and takes a toll on you both financially and emotionally. That’s where debt consolidation can help! It’s exactly what it sounds like — rolling multiple debts into one manageable monthly payment. Debt consolidation loans help by streamlining the payment process with a budget-friendly option, as well as, potentially lowering your interest rate.
So how do you know if it’s for you? Before you dive into debt consolidation, you’ll need to take stock of your complete debt picture, explains Erin Voisin, Director of Financial Planning at EP Wealth Advisors. Essentially, you look at all your different debt. Would having a single payment be a relief? Are lower interest rates (for which you think you might qualify) available? Take some time to assess your situation before you assume that aggregating your debt is the best option. “If your debt is fairly small, you can use a do-it-yourself method like the debt avalanche or the debt snowball,” explains Beverly Harzog, Credit Card Expert and Consumer Finance Analyst for U.S. News & World Report.
But if the amount of debt you possess is overwhelming, debt consolidation can help. Here’s the lowdown on the two most common (and reliable) approaches to debt consolidation.
A balance transfer is when you shift debt from one (or many) cards to another card — known as a balance transfer card — with a lower interest rate. Depending on your credit score, you may be eligible for a 0% APR. But that attractive rate will expire after a certain period, usually 18 to 21 months, which means you’ll want to pay down the debt before the rate increases. “You have to do a little math here and determine: Can I pay off my debt in the number of months I have?” asks Harzog. “When you get a balance transfer card, make sure you don’t put new purchases on it and simply increase your debt, rather than paying it down. This is a golden opportunity to help you out of debt — don’t blow it.”
With a balance transfer, one thing to be aware of is a possible hit to your credit score. “Let’s say your credit limit on your card is $10,000, and you put $5,000 on the card. You’re then at 50% utilization, and that’s going to bring down your credit score until you can make some progress paying down that debt. But that’s not reason enough to avoid getting the card — “I say go ahead and bite the bullet with the balance transfer card,” Harzog says. ‘As you pay it down, your score will go up. You’ll rebound, especially if you started with a good score.”
Debt Consolidation Loan
A debt consolidation loan is a popular alternative for those lacking credit good enough to get a balance transfer card with a 0% APR. With a debt consolidation loan, you’re essentially taking out one loan to pay off all your balances. You can think of it as a bigger umbrella loan that aggregates and covers all your smaller ones.
Sometimes, people miss payments not because they can’t pay them, but because they struggle to stay organized — which can be difficult when you’re making so many different payments. “The advantage of the debt consolidation loan it that it’s organized in one place.” explains Harzog. “You’ll make the regular payment for, say, three years, and then you’re done. That’s a huge mental relief for most people — just to have it in one place and know they’re paying it off little by little.”
You can shop for rates online, but before jumping in, read the terms carefully and ensure that you’ve got adequate cash flow to make the monthly payments. If you miss one, it will impact your credit score.
Help is Available
Debt consolidation isn’t rocket science, but it can be tricky, and you may want to [get help],” says Voisin. If you’re lost, or if you aren’t sure if consolidation is right for you, reach out to a counselor accredited by the National Foundation for Credit Counseling. You can have a free credit counseling session over the phone, and gain an understanding of options suited for your situation. “You’re not making a commitment on that phone call, you’re just gathering information,” clarifies Harzog. Information and guidance never hurt. “A lot of people wait until they’re in such serious debt — and things are so dire — that they trash their [credit] score trying to save themselves. There’s no shame in reaching out for help.”
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