Main aspects of debt consolidation
There are several vital options how does debt consolidation works, all of which allow you to concentrate your debt payments into a single monthly bill:
Get a credit card with a 0% interest rate and balance transfer: transfer all your debts to this card and pay off the balance in total during the promotional period. You will likely need a good to excellent credit score (690 or higher) to qualify.
Get a debt consolidation loan with a fixed interest rate: use the money from the loan to pay off your debt, and then pay off the loan in installments over a set period. You may qualify for a loan if you have poor or fair credit (689 or below), but borrowers with higher scores are more likely to qualify for the lowest rates.
Additional ways to consolidate debt include a home equity loan or a 401(k) loan. However, these two options come with a risk - to your property or your pension. Either way, the best option for you depends on your credit score, profile, and debt-to-income ratio.
When is debt consolidation a rational decision?
If you think how to consolidate debt successfully, remember the following conditions:
Your monthly debt payments (including rent or mortgage) are no more than 50% of your monthly earnings.
Your credit is good enough to qualify for a 0% credit card or low-interest rate debt consolidation loan.
Your cash flow is constantly covering the payments on your debt.
If you plan a consolidation loan, you can repay it within five years.
Here's a variant when consolidation makes sense: Let's say you have five credit cards with interest rates ranging from 19% to 25%. You always make payments on time, so your credit history is in order. You can qualify for an unsecured debt consolidation loan at 7%, a substantially lower interest rate.
For many people, consolidation becomes real salvation. If you take out a loan for four years, you know that it will be repaid after the specified period - provided that you make payments on time and control your expenses. Conversely, making minimum payments on credit cards can mean months or years before they are paid, all while accruing more interest than the original principal.
In what cases is it better to refuse consolidation?
Is debt consolidation a good idea in any situation? Consolidation is not a panacea for debt problems. It does not address excessive spending habits that lead to the creation of debt in the first place. It is also not a solution if you are overwhelmed with debt and unable to pay it off even with reduced payments. If your debt load is low – you can pay it off in six months or a year at your current pace – and you save only a tiny amount through consolidation, don't even think about how can I consolidate all my debt.
Instead, try using a debt repayment method on your own, such as a debt snowball or debt avalanche. You can use the credit card payment calculator to test different strategies to understand when should you consolidate debt.
Thanks to the debt snowball method, you reward yourself for victories to pay off your debt. First, you pay off your smallest debts in full and then transfer the amount used to pay off your first debts to pay off your larger ones, just like rolling a snowball down a mountain. Small wins – the satisfaction of seeing obligations paid off one by one – keep you engaged.
The debt avalanche is aimed primarily at debts with the highest interest rates. Such a way can help you save time and interest while paying off your debt.
Both the avalanche and the snowball use the money you invested in paying off your debt. Sometimes, you'll come across «extra» money, such as a discount check or a tin full of change. You can further complement any repayment strategy using found money to eliminate debt (snowflake method).
Understanding how I can consolidate my debt is not always easy, but sometimes it is necessary. If your entire debt is more than half of your income, and the calculator shows that debt consolidation isn't the best option, you're better off looking for debt relief than treading water.
It may be useful to consult with a financial specialist, and he will tell you is it a good idea to consolidate credit cards.