Debt consolidation is a method used by those who want to improve their finances through better debt management. Essentially, debt consolidation is a process of taking multiple lines of credit and rolling them up into a single new loan.
But is it smart to consolidate debt?
Oftentimes, the answer is “yes.” Debt consolidation comes in many forms. The most common are credit card balance transfers and debt consolidation loans. Both of these have their unique situational benefits depending on the individual. Here’s a basic rundown of these two major forms of debt consolidation:
Credit Card Balance Transfers
Credit card balance transfers are a type of consolidation used exclusively for credit card debt. This is a common type of debt due to its ready accessibility. Furthermore, it’s not difficult to end up with too much credit card debt due to the fact it comes with such high interest rates.
With a credit card balance transfer, you can take any qualifying credit card accounts and consolidate them into one new balance. A great element about credit card balance transfers is they often come with a low introductory interest rate to entice people to use the service. Many lenders are offering deals in the ballpark of zero-percent interest for the first 18 months.
There are a couple other important elements to note about credit card balance transfers. First, they’re generally only available to people with at least good credit. Most lenders don’t want to take on debt they don’t feel has a good chance of being repaid. People with higher credit scores are statistically more likely to pay back their debt in the eyes of a lender.
Furthermore, there’s typically a balance transfer fee. This will run in the neighborhood of three to five percent of the total transfer amount, which can add up to a substantial sum if you’re transferring a lot of money, which makes it an important consideration.
Debt Consolidation Loan
People who need something other than a credit card balance transfer can look at debt consolidation loans as another option. Consolidated loans work the same way in theory, but can be used for other kinds of debt as well, such as student loans or medical bills. Additionally, there’s a wider range of people who can qualify for a consolidated loan versus a credit card balance transfer, as the credit score requirements are less stringent.
There are also options for people to consolidate by borrowing against their mortgage or retirement accounts. But these are less common than balance transfers and consolidated loans. For all kinds of consolidation, legitimacy and affordability are two of the most important concerns. There are lots of services out there offering consolidation services. But unfortunately, not all of them are of a high quality. Those looking for an affordable debt relief plan should think about a few things that can help distinguish the good from the bad.
What to Look Out for When Choosing a Debt Consolidation Plan
There are a few things of which you need to be aware of when deciding on a strategy for debt consolidation. Not all organizations out there have the consumer’s best interests in mind.
Certain red flags can let you know whether to turn around and run away when looking at debt consolidation options:
- You get billed before you’ve been provided services. When it comes to consolidation, you might get charged a loan origination fee or balance transfer fee. Other than that, you shouldn’t be getting charged before you’ve received distinct services.
- You’re guaranteed to get out of debt. This sounds great, but isn’t the truth. No one can make a guarantee you’ll get out of debt. Doing so just shows they’re trying to scam you.
- You get a bad vibe or notice inconsistencies. If something seems off about a consolidation program, go to another one. There are enough of them out there you don’t need to settle for one that gives you a bad feeling.
Debt consolidation works for many people. It’s an effective way to beat debt without having to go into bankruptcy. Knowing the ins and outs of debt consolidation can help you do it in a smart way.