If you go by the figures released from time to time, you will understand that debt is an integral part of the American way of life. According to https://www.forbes.com, the total revolving debt in 2018, primarily credit card debt, stood at a gargantuan $1.04 trillion with the interest and fees crossing $104 billion. Even if you are left unmoved by the trillions and billions, as an average American, you are sure to be losing sleep over your credit card debt that seems to be climbing with each passing day due to the steep interest rates. If the debt burden of your credit card balances and personal loans is making you sweat, it is high time that you took the bull by its horns and attempted to get it under control. While there are many ways of getting on top of your debt and stop wasting your hard-earned money, debt consolidation has proved to be the most popular because it is easy to understand and implement and gets you the desired results quite effectively.
Before Your Consolidate Your Debts
Before you even try to understand what debt consolidation is, and which method will work the best for you, it is important that you get a fix on your finances, including the amount of debt that you are carrying at present. Review all your credit card statements and other unsecured loan statements and find out the total balance. Obtain a copy of your credit report, see whether you have missed out on any loan or if the report contains some errors, and is pulling your credit score down. The credit score is extremely useful in deciding what sort of rates of interest you will get from various lenders like NationaldebtRelief.com for the debt consolidation loan. Conduct a thorough review of your earning and expenses as well as financial and non-financial assets so that you can consider selling off a few things to pay back your creditors. If there are any assets that you can put on the block, sell them off and repay the credit card as much as is possible.
Understanding Debt Consolidation and Its Benefits
Debt consolidation comprises aggregating all your unsecured loans and credit card balances on which you pay a very high rate of interest and liquidating them with a new loan or a line of credit contracted at a significantly lower rate of interest. You will end up with a new loan of the same value of the sum of your earlier debts against which you will be required to make one payment every month for the period contracted. Existing credit card debt may also be eliminated by going in for a balance transfer, which essentially shifts all the balances of your existing cards on to a new card.
The principal benefit of consolidating debt is that you can extinguish loans with very high APRs and save heavily on the interest expense with a new loan or line of credit contracted at a lesser rate of interest. The other benefit of debt consolidation is that you no longer have to monitor multiple debts and make the separate minimum due payments monthly. Instead, you have only one loan to manage and you can set up a standing instruction from your checking account for the EMI amount to be transferred every month. The monthly payment remains fixed as typically the debt consolidation interest rates are fixed and not variable like the APRs of credit cards. You also get a chance to repair your damaged credit because when you are regular with your monthly payments, it sends out strong signals to the rating agencies that you are now financially stable. Apart from this, since the balances on your existing credit cards are now zero, the credit utilization ratio is also nil and this is a strong factor in improving your credit score.
Best Methods of Consolidating Debt
While there are quite a few ways of consolidating your debt, the choice depends on your financial circumstances. It is also very important to understand the pros and cons of each method so that you can make an informed choice. Typically, a wise choice will result in an affordable EMI, substantial savings on the cost of interest, easy enrolment, minimum or no fees, peace of mind, and a tangible roadmap to freedom from debt.
Credit Counseling and Debt Management
A credit counseling service can work with the card issuers and other creditors to get you better terms, including a lower interest rate. You are required to make a payment every month to the counseling company that will then pay the creditors. The counseling agency will evaluate the merits of your case before accepting you as a client. The agency’s proposals have to be accepted by the creditors for it to be workable. This arrangement works only if you have enough income to cover the reduced monthly payments to creditors and can afford the fee charged by the agency. You will need to stop using your credit cards and stick to a strict budget so that you can pay off the debt in three to five years. The biggest advantage of the method is that you do not need to take on a fresh loan or suffer any negative impact on your credit score.
Borrowing From Friends and Family
Borrowing from family and friends to pay off your debts is contingent on several factors. Firstly, you should be confident enough about the strength of your relationship to share your financial problems with them. They also need to have enough resources and be willing to help you. The method has the advantage of being relatively quick and uncomplicated. Moreover, you are unlikely to be charged any interest so your saving will be quite significant. There will also be no processing fees or penalties for late payment. The repayment schedule can be flexible and it unlikely that you will be sued for non-payment if it comes to a crunch though it might damage forever your relationship.
You can approach a bank, credit union or a private lender for a loan with which you can repay all your credit cards. The loan repayment will have to be made in monthly installments over the contracted period, which is usually a maximum of 60 months. The rate of interest is a reflection of your credit score and other parameters considered by the lender. You should take into account the APR to know how much you are saving. Shopping around will generally get you better rates. You need to be aware that many companies are waiting to scam applicants with loans that are never disbursed.
If you have a good credit score, you may be able to avail of a zero-percent balance transfer offer from a credit card issuer. Transferring all your other card balances will save you a huge amount in the interest cost for the period of the offer, which may be a maximum of 21-24 months. You need to make all the payments within the offer period for the best savings as normal APRs will come into effect once the offer expires. Transfer fees are generally applicable so you need to budget for it.
Debt consolidation is a very effective way of tackling credit card debt. However, the extent of the benefit will depend on how good your credit score is. It is important to realize that consolidating debt does not make it go away, it just changes places for a temporary benefit. To get real freedom from debt, you need to address the real problems and adjust your lifestyle accordingly.