Table of Contents<\/h3>\n<\/div>\n\n\n- Debt Consolidation Guide<\/a><\/li>\n
- Bottom Line – Debt Consolidation<\/a><\/li>\n<\/ul>\n<\/div>\n<\/div>\n<\/div>\n
Debt Consolidation Guide<\/h2>\nWhat Is Debt Consolidation?<\/h3>\n
Debt consolidation is a financing arrangement with the goal of wrapping two or more loans or credit lines into a new, single loan. It\u2019s one of the best strategies to consider if you\u2019re contemplating how to get out of debt<\/a>. For many individuals and couples, it\u2019s the first step toward debt freedom.<\/p>\nBut what\u2019s critical to understand with debt consolidation is that it doesn\u2019t reduce the amount of debt you owe<\/em>. It simply repackages it into a single, more manageable debt.<\/p>\nThat alone can be an excellent strategy to get out of debt. Many debtors find it easier to manage a single monthly payment on one loan than to juggle multiple payments on several obligations.<\/p>\n
But in a classic debt consolidation scenario, you\u2019re not only consolidating multiple debts under a single loan, you\u2019re also working to reduce your monthly payment. That will be possible if you\u2019re able to obtain a loan that has a lower interest rate than the debts you\u2019re consolidating.<\/p>\n
\n\n\n\nStill, another advantage is converting revolving debt, like credit cards<\/a>, into an installment loan.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\nThe problem with credit cards is their revolving nature.<\/strong> Even as you make payments on your credit cards, the balance never seems to go down. That owes to a combination of very high-interest rates \u2013 often over 20% \u2013 as well as continued use of the card for new purchases.<\/p>\nWith a fixed-term debt consolidation loan, you may be able to pay off all your outstanding debt in no more than three or five years. By contrast, credit cards tend to become permanent debt. Debt consolidation is a way to put a stop to that.<\/p>\n
<\/div>\nHow Does Debt Consolidation Work?<\/h3>\n
Let\u2019s say you have outstanding balances on five credit cards. The five cards together have a combined balance of $20,000, with an average interest rate of 24%.<\/p>\n
Your monthly payment is about $500, or 2.5% of the outstanding balance. But $400 of that is interest!<\/em> That means only $100 per month is going toward principal reduction. At that rate, it will take you at least a dozen years to pay off your credit cards<\/a>, if it ever happens.<\/p>\nYou have an opportunity to do debt consolidation. The loan is for $20,000, which will enable you to pay off all five cards. The term is five years at an interest rate of 8%. That\u2019ll give you a monthly payment of $405.53.<\/p>\n
By taking the debt consolidation, you\u2019ll not only save almost $95 per month on your monthly payment, but you\u2019ll also chop years off the payoff of the credit cards. Just the peace of mind that comes from knowing you\u2019ll be debt-free in five years will justify debt consolidation.<\/p>\n
But you\u2019ll also save a fortune in interest.<\/strong> The monthly interest charge on the debt consolidation loan will be $133.33. That\u2019s just one-third of the amount of interest you\u2019re currently paying on your credit cards!<\/em><\/p>\nThe best way to do debt consolidation is by using a personal loan. By taking advantage of the best personal loans you may be able to get a high enough loan amount to pay off all your debt and at a much lower interest rate. To do that, you\u2019ll need to thoroughly understand how to get a personal loan approved<\/a>. Many personal loans are now available from online sources, so you\u2019ll need to know exactly how the application process works.<\/p>\n<\/div>\n\n\n\nWhat Are the Pros\/Cons of Debt Consolidation?<\/h3>\n<\/div>\n\n\n\nPros<\/h3>\n<\/div>\n\n\n<\/span>Consolidate several loans and credit lines into one loan with one monthly payment<\/span><\/div>\n<\/span>Converts variable-rate credit cards into fixed-rate loans<\/span><\/div>\n<\/span>Save thousands of dollars in interest<\/span><\/div>\n<\/span>Get out of debt in just 3 to 5 years, compared with potentially never getting out of debt with credit cards<\/span><\/div>\n<\/span>Improve your credit score \u2013 see the next section<\/span><\/div>\n<\/div>\n<\/div>\n<\/div>\n\n\nCons<\/h3>\n<\/div>\n\n\n<\/span>Generally requires average or better credit, especially for larger loan amounts<\/span><\/div>\n<\/span>With fair credit, you may not save much on interest<\/span><\/div>\n<\/span>Doesn\u2019t eliminate debt immediately but repackages it into a single loan<\/span><\/div>\n<\/span>Has the potential to put you deeper in debt if you continue to borrow after securing the debt consolidation<\/span><\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/section>\n<\/div>\n<\/div>\nSome debtors have been known to do serial debt consolidations, rolling one consolidation loan into an ever-larger one.<\/p>\n
Debt Consolidation and Your Credit<\/h3>\n
One of the unexpected benefits of debt consolidation is that it can improve your credit. Many borrowers have experienced an almost immediate 20 to 30-point upward bounce in their credit scores after doing a consolidation.<\/p>\n
The reason for this score improvement is the way credit scores<\/a> are calculated.<\/p>\nTwo important factors in the calculation are 1) the number of accounts with outstanding balances, and 2) revolving credit vs. installment debt.<\/p>\n
By doing a debt consolidation and paying off several credit cards, you\u2019ll be reducing multiple credit lines down to one debt. That alone is worth a few points on your credit score. But you\u2019ll pick up a few more points because you\u2019ll be moving from revolving debt to installment debt. The credit bureaus prefer installment debt, because of its greater predictability, especially with regard to interest rates.<\/p>\n
But that\u2019s only the beginning. As you make regular, on-time payments on the debt consolidation, your credit score will continue to rise.<\/p>\n
In fact, debt consolidation can be an important step in how to build your credit score<\/a>, especially if your score needs improvement.<\/p>\n\n\n\n\nAccording to Experian<\/a>, the largest of the three major credit bureaus, the breakdown of credit score ranges looks like this:<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n![\"\"](\"http:\/\/extrastory.site\/wp-content\/uploads\/2022\/07\/8NS5I4_d6kMkPSKO2YsxEhd39q2B1G3LKe0xghWHOilrY2RJNx_8iA1SY58sz7YcVEzm900-VLf7JHi-_3U7T3PrbZHW5ue9HlJAIauyAZ_HN29lEQI49A9Kh9mCYiZ_S4jtF9SZurciBiLJkaptxg\")
<\/figure>\nAs you can see, good credit starts at 670. If your score is lower, you may need to consider working with one of the best credit repair services<\/a> to bring your score up to where it needs to be.<\/p>\n
- \n
- Debt Consolidation Guide<\/a><\/li>\n
- Bottom Line – Debt Consolidation<\/a><\/li>\n<\/ul>\n<\/div>\n<\/div>\n
<\/div>\nDebt Consolidation Guide<\/h2>\n
What Is Debt Consolidation?<\/h3>\n
Debt consolidation is a financing arrangement with the goal of wrapping two or more loans or credit lines into a new, single loan. It\u2019s one of the best strategies to consider if you\u2019re contemplating how to get out of debt<\/a>. For many individuals and couples, it\u2019s the first step toward debt freedom.<\/p>\n
But what\u2019s critical to understand with debt consolidation is that it doesn\u2019t reduce the amount of debt you owe<\/em>. It simply repackages it into a single, more manageable debt.<\/p>\n
That alone can be an excellent strategy to get out of debt. Many debtors find it easier to manage a single monthly payment on one loan than to juggle multiple payments on several obligations.<\/p>\n
But in a classic debt consolidation scenario, you\u2019re not only consolidating multiple debts under a single loan, you\u2019re also working to reduce your monthly payment. That will be possible if you\u2019re able to obtain a loan that has a lower interest rate than the debts you\u2019re consolidating.<\/p>\n
\n\n\n\nStill, another advantage is converting revolving debt, like credit cards<\/a>, into an installment loan.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n
The problem with credit cards is their revolving nature.<\/strong> Even as you make payments on your credit cards, the balance never seems to go down. That owes to a combination of very high-interest rates \u2013 often over 20% \u2013 as well as continued use of the card for new purchases.<\/p>\n
With a fixed-term debt consolidation loan, you may be able to pay off all your outstanding debt in no more than three or five years. By contrast, credit cards tend to become permanent debt. Debt consolidation is a way to put a stop to that.<\/p>\n
<\/div>\nHow Does Debt Consolidation Work?<\/h3>\n
Let\u2019s say you have outstanding balances on five credit cards. The five cards together have a combined balance of $20,000, with an average interest rate of 24%.<\/p>\n
Your monthly payment is about $500, or 2.5% of the outstanding balance. But $400 of that is interest!<\/em> That means only $100 per month is going toward principal reduction. At that rate, it will take you at least a dozen years to pay off your credit cards<\/a>, if it ever happens.<\/p>\n
You have an opportunity to do debt consolidation. The loan is for $20,000, which will enable you to pay off all five cards. The term is five years at an interest rate of 8%. That\u2019ll give you a monthly payment of $405.53.<\/p>\n
By taking the debt consolidation, you\u2019ll not only save almost $95 per month on your monthly payment, but you\u2019ll also chop years off the payoff of the credit cards. Just the peace of mind that comes from knowing you\u2019ll be debt-free in five years will justify debt consolidation.<\/p>\n
But you\u2019ll also save a fortune in interest.<\/strong> The monthly interest charge on the debt consolidation loan will be $133.33. That\u2019s just one-third of the amount of interest you\u2019re currently paying on your credit cards!<\/em><\/p>\n
The best way to do debt consolidation is by using a personal loan. By taking advantage of the best personal loans you may be able to get a high enough loan amount to pay off all your debt and at a much lower interest rate. To do that, you\u2019ll need to thoroughly understand how to get a personal loan approved<\/a>. Many personal loans are now available from online sources, so you\u2019ll need to know exactly how the application process works.<\/p>\n
<\/div>\n\n\n\nWhat Are the Pros\/Cons of Debt Consolidation?<\/h3>\n<\/div>\n
\n \n\nPros<\/h3>\n<\/div>\n
\n\n<\/span>Consolidate several loans and credit lines into one loan with one monthly payment<\/span><\/div>\n<\/span>Converts variable-rate credit cards into fixed-rate loans<\/span><\/div>\n<\/span>Save thousands of dollars in interest<\/span><\/div>\n<\/span>Get out of debt in just 3 to 5 years, compared with potentially never getting out of debt with credit cards<\/span><\/div>\n<\/span>Improve your credit score \u2013 see the next section<\/span><\/div>\n<\/div>\n<\/div>\n<\/div>\n\n\nCons<\/h3>\n<\/div>\n
\n\n<\/span>Generally requires average or better credit, especially for larger loan amounts<\/span><\/div>\n<\/span>With fair credit, you may not save much on interest<\/span><\/div>\n<\/span>Doesn\u2019t eliminate debt immediately but repackages it into a single loan<\/span><\/div>\n<\/span>Has the potential to put you deeper in debt if you continue to borrow after securing the debt consolidation<\/span><\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/section>\n<\/div>\n<\/div>\nSome debtors have been known to do serial debt consolidations, rolling one consolidation loan into an ever-larger one.<\/p>\n
Debt Consolidation and Your Credit<\/h3>\n
One of the unexpected benefits of debt consolidation is that it can improve your credit. Many borrowers have experienced an almost immediate 20 to 30-point upward bounce in their credit scores after doing a consolidation.<\/p>\n
The reason for this score improvement is the way credit scores<\/a> are calculated.<\/p>\n
Two important factors in the calculation are 1) the number of accounts with outstanding balances, and 2) revolving credit vs. installment debt.<\/p>\n
By doing a debt consolidation and paying off several credit cards, you\u2019ll be reducing multiple credit lines down to one debt. That alone is worth a few points on your credit score. But you\u2019ll pick up a few more points because you\u2019ll be moving from revolving debt to installment debt. The credit bureaus prefer installment debt, because of its greater predictability, especially with regard to interest rates.<\/p>\n
But that\u2019s only the beginning. As you make regular, on-time payments on the debt consolidation, your credit score will continue to rise.<\/p>\n
In fact, debt consolidation can be an important step in how to build your credit score<\/a>, especially if your score needs improvement.<\/p>\n
\n\n\n\nAccording to Experian<\/a>, the largest of the three major credit bureaus, the breakdown of credit score ranges looks like this:<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n
As you can see, good credit starts at 670. If your score is lower, you may need to consider working with one of the best credit repair services<\/a> to bring your score up to where it needs to be.<\/p>\n
- Bottom Line – Debt Consolidation<\/a><\/li>\n<\/ul>\n<\/div>\n<\/div>\n