Debt consolidation rolls several debts, usually high-interest debts like credit card bills, into one payment. If you can get a lower interest rate, debt consolidation might be a great option to consider. It will help you reduce your debt amount and reorganize it, so you can clear debts faster.
The two primary ways in which you can consolidate debt (which concentrate the debt amount to be paid into one bill) are:
Get a 0% Interest, Balance Transfer Credit Card
Transfer any debt onto this card and during the promotional period, pay the balance amount in full. To qualify, you will most likely need a good or excellent credit score (690 or more).
Get a Fixed-Rate Debt Consolidation Loan
By taking this loan, you can use the money to clear off your debt, and then pay the loan amount back over a set term in installments. Even if you have bad or fair credit (689 or below), you can qualify for the loan. But those who have higher scores will easily qualify for lowest interest rates.
Other ways of consolidating your debt are taking out a 401(k) loan or home equity loan. However, these options involve risk to your retirement or home.
If you’re wondering when debt consolidation would be a smart move, you’ll require the following to succeed with a consolidation strategy:
- Your cash flow covers payments toward your debt consistently
- Your total debt excluding mortgage does not exceed 40% of your gross income
- You have a plan to prevent getting into debt again
- Your credit is good enough to qualify for a low-interest debt consolidation loan or 0% credit card.
Debt consolidation reveals a light at the end of the tunnel for many people. If you take a 3-year term loan, you know it’s going to be paid off in 3 years (assuming you manage your spending and make your payments on time).