Should You Consolidate to Reduce Your Debt?
Is your debt spread out in all directions—through loans, credit cards, a mortgage (or two), you name it? Are you carrying credit card balances on high-interest cards that you can’t seem to pay off? Are you struggling to save for future needs or significant life changes like retirement? If so, debt consolidation could help reduce your monthly financial obligations (and your stress), open up your monthly cash flow, and ultimately allow you to reduce your debt more quickly.
Should you consolidate debt on a credit card?
Using credit cards for debt consolidation certainly has its benefits. Many credit card companies offer 0% rates for specific periods of time, which is great if you can pay the card off within the allotted time. However, most also charge a balance transfer fee, and if you only make the minimum payments, you will have a balance when interest charges begin. If you are someone who can budget, pay extra each month, and not continue to use the cards, this might be the perfect option for you.
Are there better options out there?
To ensure that your debt is paid off within a specific period of time, with a set monthly payment, a debt consolidation loan is often the way to go. If you have collateral to secure the loan (the title to a vehicle, equity in a vehicle that you are currently paying on) you will get the best rate and therefore pay down the debt quicker. If you do not have collateral, you could consider a personal loan. The interest rates on personal loans are higher than on loans that are secured with collateral, but the personal loan will give you the ability to pay down the debt at a set payment and term until it has been paid in full. No more revolving balances and fluctuating payments!
If you own your home and have equity available, you can consider a home equity loan. In general, I would not recommend using a long-term loan to pay off credit card debt. However, if you are saddled with credit card debt that you will not be able to pay off within five years or so, this option may make sense. Most credit unions and banks have made home equity loans easier to use, by eliminating closing costs or using tax assessment for value rather than requiring an appraisal.
How can you get started?
If you’ve decided that consolidation is right for you, here are a few things you can do to begin the process.
- Take out your credit card and loan statements and look at the rates.
- Go online and compare your current rates to those offered at your local credit unions and banks.
- Walk into your local branch and sit down with a consultant to review your options.
- Review your credit report to ensure that the information is correct and therefore your credit score is the best it can be, as this will affect your loan interest rate.
Being an informed borrower is the first step to financial success and reaching your goals.
Subscribe to the EastRise blog
Stay up to date on financial tips, tricks, and tools that will build your financial skillset and help you reach your goals.