Debt can happen to anyone. People often borrow more than they can afford in hopes of a smart investment or making a down payment on a house. But this can lead to a never-ending cycle of minimum payments, tanking credit scores, and the need for some kind of debt relief. So is consolidating your debt a good idea? Let’s talk about it.
How Does Overwhelming Debt Happen?
For a lot of young people, their debt can start with going to college. This can be extremely expensive for people who don’t receive financial aid or scholarships, so they are forced to take out loans.
Another reason debt happens is because of credit card companies. They often prey on young people who need money to keep up with the cost of living while they’re in school. Credit cards make it easy to swipe your card and think about the consequences later. The interest on credit cards, especially for people with new credit, is often very high. This means every time you don’t pay the full balance on your card, you accrue 20-30% more debt every month.
After people graduate college, they often need to find a job, which usually means commuting. If they didn’t have a car before, they’ll need one now. This leads to car payments on a car loan that can contribute to the debt burden.
The next step is usually finding a home. People can rarely buy a house outright with cash unless they have been saving for many years beforehand. So now you’ve got student loans, a car payment, credit card debt, and a mortgage? So what can be done to pay off your debt?
What is Debt Consolidation?
Debt consolidation is when you combine all of your loan payments and debts into one payment. This is done by taking out a new loan which usually has a better interest or monthly payment. This can help with all kinds of debts, including student debt and credit card debt. Consolidation doesn’t get rid of your debt but it transfers them to a new lender.
There are two types of consolidation: secured and unsecured. A secured loan is usually backed by assets for collateral, whereas an unsecured loan is not backed by anything. Unsecured is usually harder to get.
Creditors are all for debt consolidation because it greatly increases the likelihood of them being repaid in full. A lot of credit unions and banks offer this service but there are also other companies that offer consolidation options.
Benefits of Debt Consolidation
There are many reasons why debt consolidation may be a good option for you.
The first is that these loans usually have fixed rates of interest, so they won’t increase over time. Another benefit is that it makes debt easier to manage. Instead of remembering to pay different amounts at different times of the day, you only have one payment to make.
Debt consolidation can also help increase your credit score. This will help you down the road after you are out of debt if you are looking into other investments.
You could also potentially get a tax break for consolidating your debt through a lender. This only applies to secured loans with backed assets, though.
Who is a Good Candidate For Debt Consolidation?
If you are looking into debt consolidation as an option, you must meet a few requirements to do so. First, you will need to have an adequate amount of income to show that you can make the monthly payments. You also have to have creditworthiness. This is how a lender figures out how worthy you are of receiving
This is usually determined by your credit score and the history of your payments. You will also most likely need a letter from your employer and statements from your credit cards.
Good candidates for debt consolidation usually have a large amount of debt. This is anywhere between $10,000 to $50,000. If you only have a small amount of debt under $5,000 it may not be worth it to consolidate.
What Are Your Options?
If you want to consolidate your credit card debt specifically, you can transfer your credit card balances to a balance transfer credit card, which is a credit card specifically intended to essentially pay off your other credits cards and consolidate debt into one card. A lot of balance transfer credit cards offer a period of no interest when you sign up, so you can get ahead on payments without accruing interest. Credit card companies often have an option to transfer the balance of your card elsewhere.
If you want to consolidate your student loans, there are options for this from the federal level of government. They offer consolidation loans through their program and usually offer a lower interest rate. If you have a private student loan, you cannot go through the federal government for consolidation. But you can go to a different private lender to consolidate multiple private loans to get better repayment options.
You may also qualify for a home equity line of credit for consolidating debt. This is a benefit of owning a home because you can build equity over a period of time. You can take out a second mortgage to get a loan or a home equity line of credit. These are secured against the value of your home’s equity that you have, so you can usually get pretty good interest rates for this kind of consolidation.
How To Stay Out of More Debt
Once you’ve decided to consolidate your debt, you should stop using your credit cards. This means you might have to make some lifestyle changes. It might be difficult at first but if you want to be free of debt these steps are necessary.
- Try to budget the money that you do have with a budgeting app or sheet. There are a lot of applications that allow you to put in how much money you make and all of your bills for that month. This can really help you see how much you can spend without going over.
- Online shopping is really easy these days because of the automation they provide. Once you start the checkout process, a lot of online stores already have your payment information stored. This makes it easier to purchase things without thinking about it. Try to turn this option off for as many sites as you can.
- If you are paying for any monthly services or subscriptions that you don’t need, cancel them. This can save you hundreds a month.
- Get rid of stuff you don’t use by selling it. This is a great way to make a little extra money to help pay your bills.
- Talk to your partner (if you have one) about money. Make sure you’re both on the same page with spending and what qualifies as a necessary purchase.
- Make sure that you are spending less than you make. You might have to eat out less or switch your phone plan, but this is an important part of staying out of debt.
- Set reminders on your phone or your calendar when your bill payments are due. The last thing you want is a late fee being applied to your statements. Make sure you set the reminder for a few days before the bill is due. You can also consider switching to automatic payments.
- Impulse purchases are where people really start to get in trouble with money. A good rule of thumb for buying things you don’t need is thinking about how long it will take to pay it off. If it is more than a month, then don’t buy it.
Debt consolidation may not be for everyone, but it can be a life saver if you’re unable to chip away at your debt on your own.
Debt can be difficult to get out of, but you’ll ultimately save money if you pay it off sooner than later. Sometimes you’re in too deep before you realize it and you end up feeling suffocated by payments. Debt consolidation can help simplify your debt, whatever it may be. Remember to take all the options into consideration before making your final decision. Do some research to find the best debt consolidation for your needs.
When you initially consolidate your debt, your credit score may dip and your credit report may take a hit, but it will return to normal or get even better after you’ve started making your payments.