Military Debt Consolidation Loan - Learn about nonprofit debt relief options that can help you save time and money on your credit card debt.
Used wisely, credit cards open all kinds of convenient doors, but if used incorrectly, they can dig you into a financial hole.
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When you're carrying a heavy debt load, it can be difficult to stay on top of the payments, especially if your debts are spread across different types of credit cards and loans. If you're looking for a way to make paying off your debt easier, consider debt consolidation.
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Consolidating your debt means transferring your debt to a single lender. Instead, you only need to make a single monthly payment to a single lender. And depending on your creditworthiness, when you consolidate your loans, you may qualify for lower interest rates and lower payments.
"Because everything is in one plan, you stay organized," says Beverly Herzog, credit card expert and consumer finance analyst for U.S. IT News and World Report. Also psychological."
In this guide, we'll go over some common debt consolidation options and walk you through step-by-step how to consolidate your debts:
If you have good credit, consider transferring your credit card debt to a single credit card. Ideally, the credit card will have an initial zero percent APR for the first year.
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As you can imagine, if you have less than stellar credit, you may not qualify for this type of card. If you do, you may not be eligible for the interest rates and terms required for a financial transfer.
1. Pay off your debt. These include the amount owed, interest rate, monthly minimum payment, lender and repayment period. If it's been a while since you checked your credit, you'll want to double check all the information before looking for a credit card.
2. Order a credit report and check your score. You can get one free report every 12 months from each of the three major consumer credit card bureaus—TransUnion, Equifax, and Experian. Since you are entitled to one free report each year, you can order one report from all three bureaus and save the other two for later use. You can order a free report from AnnualCreditReport.com.
After you receive your credit report, check all information carefully for accuracy. One area you'll want to pay attention to is your account and payment history. If the information is not correct it may cancel your payment plan. If the information is incorrect, you may want to file a dispute. The office usually has 30 days to review your claim.
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You can order a credit score, or check it from a free credit monitoring service. Many money management apps and credit cards these days offer customers their credit scores for free. Note that there are multiple credit scoring models, so the score you receive may differ from FICO® or VantageScore® from the credit card bureaus.
3. Shop for credit cards to see which ones you qualify for When you transfer credit card balances, you should request a limit high enough to cover balances on multiple cards, Herzog says.
Let's say you have three credit cards. Card A has a balance of $5,000, Card B has a balance of $9,000, and Card C has a balance of $2,000. So your transfer credit card limit needs to be $16,000. Since your total balance is $16,000, the limit for transferring all of your existing balances on the card must be high enough where it doesn't hurt your credit utilization ratio (this is the percentage of available credit that you're currently using. Ideally, you'd want this number to be 30 if possible. want to keep below the percentage).
And you don't necessarily qualify for a zero APR credit card. If the interest rate is lower than your other credit cards, it will save you money. For example, if your existing credit card has a minimum interest rate of 20 percent, it will save you money if you qualify for a 10 percent or even 15 percent interest rate, Herzog explains.
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4. Apply for a credit card. This is a hard draw, which means it can negatively affect your credit score. Be careful when applying for new credit.
If you have less than stellar credit, debt consolidation may not be the best debt consolidation option for people with poor credit. It can actually be a debt management plan.
5. Aim to pay off your balance during the introductory period. If you don't pay off your loan within the initial period, you'll be stuck with the standard interest rate for the remaining payments. This is likely to be higher than the interest rate on your old card, so be very careful. Only open a new credit card and transfer your balance if you have a long-term plan to pay off the debt.
6. Do not accumulate any additional credit card debt. If you're tempted to keep spending on credit and build up additional debt, you may want to close your old credit cards. Before you do, remember that closing an account will lower your credit utilization ratio.
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For example, if your three old cards have a spending limit of $20,000, and the new card has a spending limit of $30,000, that brings your total spending limit from $50,000 to $30,000. And if your total balance is $10,000, your credit utilization will increase from 20 percent to 33 percent.
So it may be better to keep your cards open, exercise discipline and not use your credit cards until they are paid off. The key is to be honest with yourself and choose the option that best helps you achieve your goals. It's perfectly okay to admit to struggling with certain spending impulses—the key is to deal positively with those impulses.
Another way to consolidate your debt is to take out a debt consolidation loan. You can consolidate your existing debts, whether they are credit cards, medical bills, personal loans or a payday loan. These loans are considered as personal loans.
Stephen Newland, a certified financial advisor and host of the "Find Your Money Path Show," says the first step is to know what kind of debt you have. And just like with credit card loans, you need to calculate the loan amount, interest rate, repayment period and lender. "By far the best thing I've seen is to list your loan balance, your interest rate, your monthly payments and how much you have left on your loan," explains Newland. "Sometimes we think things are worse than they are until we get them on paper. Even if it's bad, this practice allows us to take some layers of emotion and just see the facts.
Compare Options For Credit Card Debt Consolidation
A local bank, credit union and reputable online debt consolidation are the places to explore your options There are two main types of debt consolidation loans: secured and unsecured. Secured loans are backed by some type of collateral, such as the equity in your home. On the other hand, unsecured loans are not backed by collateral. Take a closer look at rates, monthly payments, loan length, fees and if there's a penalty for paying off your loan early (yes, that's a thing, sadly). In addition to simplifying your loan, compare terms and rates with your existing loans.
Ideally, the rate should be lower than what you are paying now. You can also choose a debt consolidation loan that helps you lower your monthly payments. Keep in mind that this can extend your repayment period, causing you to pay more in interest over the length of the loan.
If you're going to be paying more for the new debt consolidation, you might want to ask yourself why you're consolidating your debt in the first place, Newland points out. "Is it reducing your monthly payment because you're having trouble paying it each month?" Newland said. "If so, ask yourself if you've explored all other options, such as cutting costs or overworking?"
Before you take out a debt consolidation loan, determine how much you can afford to pay each month. This will help you decide which loan and repayment plan to go with. Look carefully at your budget, and see if there are any areas you can cut back on.
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This will help free up some cash so you can stay on top of your monthly payments on your new loan. You may want to find ways to raise extra cash to put toward paying off your debt. This could be putting in extra hours at work, doing side hustles like ride sharing, tutoring or babysitting.
There is so much data that it can be paralyzing, points out Newland. "For most people it feels like an impossible cliff and it can create a fear of moving forward," he said
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