Debt consolidation is a process that works well for many people who are struggling with debt payments. While it’s not unusual to have some debt, there are certain cases in which people have more payments than they can handle.
Whether you struggle to pay your bills or just want to simplify your payment schedule, debt consolidation can help. If you are interested in debt consolidation, having a poor credit history is something that may interfere with your ability to use this method, so you need to consider if this is the right decision for you.
As this method is not a fix-all for debt issues, it’s important to carefully consider all angles before making a decision. This article will provide clarity on what this process is and what it’s not, as well as some ways to tell if it might work for you.
What is debt consolidation?
Simply put, debt consolidation combines multiple payments into one single payment. It can also help to lower your interest rates, which allows you to pay off your debt faster.
There are three main ways a person can apply for this process:
- You can apply for a balance transfer card with a low- or zero-interest rate. Then, you can transfer all your higher-interest card balances to this new card. For this to work, you will need to qualify for a card with a higher limit than what you owe on your other cards combined. Additionally, you will also need to pay off the card’s balance within the promotional period before the annual percentage rate (APR) rises, if applicable. Otherwise, you might wind up paying more than you would have otherwise.
- You can get a debt consolidation loan. This can be done through a number of lenders who will give you a loan you can use to pay off your debt. Then, you use the loan money to pay off all your other debt forms. Afterward, you pay off your loan by making monthly payments to whatever lender you borrowed from.
- You can take out a loan on your own and use the money to pay your debt in a single payment. This is usually done by taking out a loan against home equity or a 401(k) loan, which has risks that need to be carefully considered.
Is debt consolidation right for me?
For many, consolidating credit card debt sounds like a perfect option. However, it is crucial that you carefully assess your situation and options to decide if consolidation is the best course of action for you.
Debt consolidation may be a good option for you if your total debt (excluding mortgage) doesn’t exceed more than 40 percent of your income. If your debt is small enough, you may be able to pay it off on your own with a bit of dedication and careful budgeting.
Your will also need to make sure you plan carefully for the new higher payment. You will need to ensure you have enough expected income to cover your new lump sum payment every month.
Furthermore, regardless of the method you use to tackle your debt, it is vital that you come up with a detailed plan to avoid falling back into debt. This will help you maintain control of your finances well into the future.
Best Debt Consolidation Programs
- National Debt Relief
- Lending Tree
- CareOne Debt Relief Services
- Lending Club
- American Debt Enders
- OneMain Financial
- Debt Consolidation Care
What to Look for in Debt Consolidation Programs
If you’re searching for a debt consolidation program, it’s important that you do your research and figure out which program is best for you. The following tips can help you make sure you’re choosing a debt consolidation program that suits your needs.
1. Check online ratings.
The first thing you should always check when considering whether or not to fill out an application for a loan or credit card is is the online rating the lending company has received. You can also check the Better Business Bureau’s (BBB’s) consolidation page. Here, you can read complaints from customers and review BBB ratings.
2. Understand the minimum eligibility requirements.
Those who are applying for debt consolidation should carefully review any minimum requirements set forth by the lender before filling out an application.
3. Be aware of the interest rate you’d need to pay.
While you won’t know the exact interest rate you’d be responsible for paying until you apply for a consolidation program, you can often browse online forums and get a good idea. Additionally, many companies give an estimated range for their annual percentage rate (APR) before running a credit check on you.
4. Ask about origination fees.
The company issuing your loan usually charges these fees, and they cover the expenses related to processing your application. Fees are often based on a percentage of the total loan, such as a 2 percent origination fee. These can add up quickly, so make sure you review carefully.
5. Understand the minimum monthly payment you’d need to pay.
When you consolidate credit card debt, you will need to ensure you can meet at least the minimum monthly payment. Generally, a shorter loan lifespan will have a lower APR compared to a loan that stretches over many years.
6. Ask about late fees.
It’s important that you make your monthly payments on time. However, there may come a time when you pay late. In these instances, it’s important that you know the type of late fees you’d be subject to paying.
7. Make sure you understand any early payoff penalties.
You may think that paying off your loan would be a good thing. However, this isn’t always the case. Some companies charge you for paying off your loan before your term ends.
Before you agree to the terms of a loan, make sure you understand what, if anything, happens if you pay off the loan early.
Can I consolidate my debt if I have a poor credit history?
Generally, to be accepted into debt consolidation programs, you will need to have a good credit score. If you have a fair credit score that falls in between 580 to 660, then you may have a shot at receiving a lower rate.
Meanwhile, if you do not have a good score, you will likely not qualify for an interest rate that is significantly lower than the ones associated with your current credit cards. You may also find it difficult to get approved for a consolidation loan or card, as your poor credit score makes you seem like a high-risk to lenders.