If you’re struggling with debt, you are not alone. Total household debt is on the rise, which includes student loans, mortgages and credit card debt. The average American carries a credit card balance of $6,194 on their credit card, according to Experian.
Dealing with debt can be daunting, and a debt consolidation plan can be a way to save money and get your finances in order. But what does debt consolidation involve? Before you apply for a loan or sign on with a debt settlement company, here are some facts you need to know about consolidating debt.
What is debt consolidation?
Debt consolidation involves taking your high-interest debts, such as loans and credit cards, and combining them into a lower-interest payment. Let’s say you owe money on three credit cards; that’s three different payment schedules and three different interest rates. With debt consolidation, you can combine these three debts into a single debt. Everything is now in one place and you’re making a single monthly payment.
Is consolidating my debt a good idea?
To decide if debt consolidation is right for you, ask yourself these questions.
1. Do I have a lot of unsecured debt? Unsecured debt is any debt that does not have physical property as collateral against it. An example of an unsecured debt is your credit card debt. If you have a significant amount of this kind of debt, then consolidation is a good option for you.
You wouldn’t want to consolidate against secured debt, like a mortgage, as you would risk losing your home if you miss a payment.
2. What are the APRs on my credit cards? The average credit card rate can range from 16 to 19 percent. And if you don’t pay your minimums, this rate can jump as high as 23 to 29 percent. If you are in the latter range, you should look to consolidate, as you will likely get a better rate.
3. Do I have good credit? Your credit score will determine what rate you can get. If you have a credit score of 640 and above, you could look into a personal loan to consolidate your debts.
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How to get started with debt consolidation
If you have reviewed your finances and think debt consolidation is right for you, here’s how to get the process started.
Set up a credit counseling session
A credit counselor can help you look at your finances holistically and identify the best avenue to reach your debt-free goals. You can find counseling resources at the National Foundation for Credit Counseling or the Financial Counseling Association of America.
Consider your options
The two most common debt consolidation options are: a lower-interest balance transfer credit card or a debt consolidation loan. Compare the terms and interest rates.
Commit to your debt plan
Consolidating your debt is only the first step. Your debts won’t disappear overnight, so understand and accept that it’ll be a process. Be sure to schedule your monthly payments on time, and review your budget for any other potential ways you can save money to pay off your debts faster.
With the right mindset and a solid plan, you’ll be on your way to financial well-being.
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