Debt Consolidation is just what the name sounds like. It is the process of combining all of your outstanding credit card debts into one or “consolidating” your debts into one single debt. It’s a loan. But the goal is that the new loan amount will have a lower interest payment than your current APR for your credit cards do. You will get all the information like you would a car loan or a home loan: the pay-off amount, the monthly payment, and the APR rate. Again, this will not reduce the balance you owe, just the interest rate.
It’s also more convenient because you are making one single payment a month and not sending payments to multiple credit card companies. Your APR will depend on your current FICO score. It’s wise to compare rates and lenders. Some of the larger banks will not offer debt consolidation loans. You need to calculate the long-term costs. Your initial monthly payments should go down; however, it’s wise to understand the total cost for borrowing. If you end up making more payments for a longer term, then your actual savings could be negligible.
The loan amounts can range from $2,000 to $35,000 depending on the lender. There will also be administration fees with APR rates ranging from 9.95% for good credit scores to 35.99% for not-so-good credit scores.
One way to consolidate your debt is through a balance transfer credit card. This can be helpful if you have multiple credit cards with varying interest rates. You can even transfer non-credit card payments, such as medical bills, to a lower interest rate card. It’s important to take a look at the fine print, however. You’ll need to evaluate the terms of the low-interest rates, such as balance transfer fees and length of time on the special introductory rate. Using a balance transfer credit card could significantly increase your debt if you’re not able to pay off the debt before the interest rate increases.
Another thing to consider is how long it will take you to pay off your entire debt. Do the potential fees, interest rates, and length of payments make it worthwhile to consolidate your loans? If after doing your research you aren’t sure if debt consolidation is the right plan for you, it might be a good idea to look at your other options. Regardless of the plan you choose, you’ll want to work on a budget to ensure that you’re able to remain debt-free once you’re able to pay off your debts.