Credit Consolidation | Figuring Out How to Pay Back

Credit Consolidation | Figuring Out How to Pay Back – Are you having trouble paying your dues? Figuring out how to pay back what you owe can be a difficult and confusing process. Debt is costly and can stymie your financial goals. Credit consolidation is one approach that might help you move forward to pay back what you owe.
Credit Consolidation

What Is Credit Consolidation?

Credit Consolidation

Credit consolidation is a form of financial help. It is the action of taking a large loan to pay back whatever outstanding credit you still owe. It is meant to roll multiple debts into a simpler single-payment plan, which is one way of keeping your credit debt in check.

Paying back all your smaller debts through one loan allows you to move past looking at your dues as manifold. Instead of focusing on many payments, you only need to worry about paying back the principal loan in installments. These installments are usually paid on a month-to-month basis.

 This financial move can help you save money on interest, lower monthly payments, and pay off your credit debt faster. By consolidating your debt, you can expect to see a lower interest rate, an easier payment plan, and a higher credit score.

Personal Loans Are The Usual Option

Credit Consolidation

A personal loan, which is usually paid back in-between 1 to 7 years, is an ideal option because the fixed time period allows people to pay back the loan in specific installments. It basically makes your payments more manageable. Additionally, credit consolidation may be cheaper than separately paying back all your smaller debts, since those are likely to have high interest rates attached to them.

However, you will need a good credit score to pull down the interest demanded on a personal loan. A bad credit score can lead to interest rates that are just as high as any of your smaller dues.

The interest rates on personal loans range from 5% to 36%. Even with an excellent credit score, the interest rate will still be around 10% usually.

Credit Cards Are Another Option For Consolidating Debt

Credit Consolidation

Getting a credit card with a 0% annual percentage rate. These rates usually come with promotional cards. These types of cards allow anywhere from a few months to up to two years to repay the balance without incurring interest fees on top of the principal.

Here Are Other Possible Routes For Consolidating Debt

There are a couple of options outside of the traditional loan and promotional credit card options that many debt holders are interested in exploring further.

  • Home Equity Loans – This was one of the more popular ways of consolidating credit card debt before the 2008 financial crisis hit. The main benefit is deducted interest, but at the cost of putting your home up as collateral. By using the equity on a property, you could consolidate or refinance your debt with considerably lower interest rates, according to Forbes.

  • 401(K) Loans – These types of loan plans allow you to borrow against your retirement savings. This is a low interest loan, but there’s a fair bit of risk associated with these plans. The plan allows you to borrow up to half the funds in the account for a maximum period of five years. The maximum that can be borrowed is $50,000. Ne​​​​rdWallet recommends using this type of plan as a last resort.

  • Balance Transfers – This option is very similar to the promotional credit card route for debt holders. However, it is an option that allows you to transfer high-interest debt on credit cards, store cards, and other loans to a single stakeholder, like a regional bank, which is offering low interest rates. If you don’t have a lot of debt, and an excellent credit score then this is the cheaper option to take.

Banks Can Offer Specific Loan Packages For Credit Consolidation

Credit Consolidation

Banks are aware of credit and debt consolidation services, and provide those to customers interested in taking out a loan or promotional credit card for that purpose.

There are specific plans that allow you to get a fixed-rate debt consolidation loan, which you can then pay back to the bank in installments over a set number of terms.

Getting a loan from the bank may be a harder option to pursue than paying off the credit debt on a new card or putting your home up as collateral. The benefit is that a loan is a secured debt, since it is guaranteed to be there based on the borrower’s funds or assets. Credit cards and other forms of financial assistance may not hold this guarantee of available funds.

The downside in finding a secured debt like a bank loan is that there are strict requirements on receiving it such as a particularly high credit score range.

When Is Credit Consolidation A Good Idea?

Credit Consolidation

Credit consolidation is an appropriate action to take if you are not struggling to meet your debt obligations, but are looking to get a better handle on them. It also focuses on saving you money in the long run by cutting down on interest payments.

If your interest rates on credit loans and other debts are high and varied then consolidating your credit debt is a good path to take. While consolidating debt is a relieving strategy, it may not solve the original problem of how you fell into debt. If your spending habits are under control then consolidation becomes a viable option. However, it is important to note that for consolidation practices to work you should not fall back into debt.

Consolidating Your Credit Card Debts

For example, say you have credit card payments each month on multiple cards but are still able to meet your payments. If you want to handle these payments at once and lower your interest costs then a loan with a lower interest rate has a lot of appeal. You can save money on interest and pay back your debt faster.

This process is a way for debt holders to buy time. It is important to consider whether you are willing to pay less now but for longer duration of time. If you are not disciplined in handling your finances then this practice is not going to work. According to reporting by CNBC, there are many debt consolidators who run up new debt on a credit card a year after receiving a loan.


Choosing An Option That Works For You

There are some key points to be aware about when it comes to successful credit consolidation.

Credit Consolidation

  • Income – Your debt should not exceed half of your annual income. Your annual take home wage is an important factor in determining whether credit consolidation is the right move for you.

  • Credit Score – Your credit score should be good enough to qualify for a promotional credit card, which offers an exceptionally low APR. There are a number of ways to maintain your credit score as well as to drive it up. The main thing to remember when trying to maintain a good credit score is to always pay your credit bills on time. Failing to make your payments can take a huge bite out of your overall score.

  • Liquidity – Your cash flow is enough to cover a portion of your debt during every installment phase.Living in debt can be advantageous as well, but mainly if you have a solid plan in place to pay back what you owe. One big way for you to be on top of paying back what you owe is by keeping enough money on hand every payment cycle.

  • Plan – Make sure that there is a solid path forward that prevents more debt from accruing.Credit consolidation is a pointless move to make if you end up falling back into debt. A plan helps pave a way to a financially stable future while living with debt.

Focusing On Paying Back High Interest Dues

Most people focus on paying back debts that have high interest rates attached to them, such as credit card debt. These dues are the payments that are really going to cut into your wallet in the long run. They are also the dues that credit consultation advisers will either advise you to pay first or will pay off for you first.

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