Debt is a subject that’s on everyone’s mind. It causes stress, and it keeps people up at night. If you find yourself under a mountain of debt, it’s time to take control of your money. Consolidating credit cards, loans and medical bills is one way to lower your interest rate, pay down more of your balances and free yourself from financial burdens. Follow these five tips to find the best solution for controlling the debt monster.
1. Checking Your Credit History
As you consolidate your bills, you might apply for a new credit card or loan. Check your consumer credit report to see where you stand. Look for errors, and dispute incorrect information. You’re entitled to receive a free copy of your credit report from each bureau every year. Take steps to lower your balances and improve your payment history before you apply for a loan or open a new credit card. You’ll earn favorable interest rates and better introductory offers.
2. Understanding Your Options
Today, there are many ways for consumers to consolidate their bills. Regardless of which option you choose, only work with a reputable company. Check reviews, and verify the company’s credentials with state licensing bureaus and the attorney general. Don’t do business with any agency that makes false or illegal claims. Here are three legitimate debt consolidation options.
- Check your existing credit cards for balance transfer offers. These promotions let you consolidate balances at a lower interest rate. You can pay off multiple high-interest accounts, save money and have just one monthly payment. If your current credit cards don’t have any offers, it might be time to switch. Consumers with good credit can qualify for competitive promotions. However, subprime interest rates, low credit limits and large late fees can affect the viability of this option.
- Debt consolidation loans are best for consumers with good credit. To save money, you need to qualify for an affordable interest rate. Personal loans can combine up to $35,000 in unsecured debt depending on your income. You can consolidate medical bills, auto loans, credit cards, student loans and other debts. You’ll have between three and seven years to repay the loan. A longer term will lower your monthly payments, but you’ll pay more.
- Debt management plans (DMPs) are directed by local local credit counselors. You pay the agency each month, and your counselor pays your bills for you. These nonprofit organizations charge very little. Because they work closely with creditors, they can sometimes lower your interest rate. The downside is that the DMP will impact your credit score, and you won’t be able to open new accounts. DMPs are ideal if you have substantial unsecured debts that can be repaid in three to five years. These agencies offer free or low-cost counseling sessions if you need more advice.
3. Comparing Costs
- Balance transfers can save you money, but most companies charge 3 to 5 percent. Check the APR and expiration date on all offers to avoid unexpected fees. Don’t make new purchases after you transfer a balance. That could void the promotion.
- Lenders often add origination fees to personal loans. In some cases, interest rates are higher than credit card fees if you don’t have exceptional credit. Weigh these expenses as well as the potential benefits and drawbacks.
- The average cost of a debt management plan is $25 per month. These agencies can lower your interest rates, so you’ll save money that way too. Above all, a debt management plan will help you to stay on track and avoid accumulating more debt.
4. Improving Your Credit
Debt consolidation will most likely affect your credit score, but you can start improving it immediately. Work toward getting your balances around 30 percent of your credit limit. Minimize loan and credit card applications. This will increase your chances of qualifying for better terms. You will also have more debt consolidation options. Learn about the factors that affect your credit rating so that you can develop an action plan. For example, a low-interest loan could improve your credit score gradually by diversifying your credit history.
Whatever option you choose, you need to stick with it. Make sure that the plan is manageable and that you’ll have enough money to cover your debts and expenses now and in the future. Don’t overextend yourself. If the plan is realistic, you’re more likely to succeed. Track your decreasing balances. Cross goals off your list, and monitor your credit score to stay motivated. Climbing out of debt is like dieting. It’s not a thing that you do for a few weeks. It’s a lifestyle that you need to maintain. Once you’re out of debt, you can use your money to grow your wealth.