In this lesson you’ll learn how you can use debt consolidation to reduce your interest rates and the number of bills you need to pay.
Debt consolidation is a process for paying off multiple high-interest debts using a lower-interest loan. Debt consolidation can quickly reduce your monthly payment and give you peace of mind by helping you know exactly when your debt will be fully paid off. Click here to read this NerdWalet artical that explains how it works. There are several ways to get a debt consolidation loan.
A balance transfer credit card is a credit card that offers a zero percent introductory APR for a short time, typically from one to two years, that you can use to pay off the balance of other cards. If you have a small amount of debt and know you’ll be able to pay it off in a short time, you may be able to save money by transferring the balances and paying off the new card before the introductory APR runs out. You may not be able to qualify for a new card, though, if your income or credit score is low. This Investopedia article explains how it works.
A traditional debt consolidation loan is a personal loan you can use to pay off other loans. You can apply for one at many banks and credit unions. Interest rates on traditional debt consolidation loans are typically low, but not zero percent. Your bank or credit union may be able to lend you more money to pay off your existing debts than you could get with a balance transfer credit card, though, and you’ll probably have a fixed monthly payment for a few years. You may be able to qualify for a debt consolidation loan even if your credit score is low, but it’s important to know what the interest rate, monthly payment, and payoff date of the loan will be. This Bankrate article explains how it works.
If you’ve owned a home for a long time, and its value has gone up, you may be able to refinance your home mortgage or apply for a home equity loan. When you do this, your lender or mortgage company will pay off your existing debts by sending checks to them directly. You won’t have any more credit card bills, but you will have a bigger house payment. It’s important to understand how big your house payment will be, because you could lose your home if you’re not able to make the bigger payment. This Forbes article describes the benefits and drawbacks of this approach.
If you have a retirement savings account, such as a 401K or IRA, or if you have some types of life insurance, you may be able to borrow money from your own savings to pay off your debts. You’ll need to pay yourself back, though, and you could find yourself in trouble if you suddenly find yourself out of work. This NerdWalet article describes the benefits and drawbacks of this approach. Debt consolidation may be appropriate for you if you have a good to excellent credit score and are able to qualify for the best interest rates. If you have a lower credit score, you’ll need to work hard to increase your credit score using one of the methods above before you’ll be able to qualify for debt consolidation.