It is a cold, hard fact that most Americans are in so much debt. 26.4% of the total US consumer debt goes to credit cards and other parts cover education and auto loans. This amounts to a staggering $3.95 trillion this year, and the numbers keep rising.
Debt can be devastating in more ways than you can imagine. For one, it affects your credit score, which will make it harder for you to take out loans in the future. It also puts a dent to your personal finances because of the added expense of repayments. This makes it harder for you to balance your money, let alone save for your future. Luckily, there are ways to repay your debts, one of which is through consolidation.
First, what is debt consolidation?
Debt consolidation is an option for repaying debt by rolling high-interest debts like credit card bills into a single repayment. This helps you re-organize your debt so you can pay it off faster and reduce your total debt to a more manageable amount. Debt consolidation is a great way to tackle multiple bills with different due dates and interest rates, so you can just make one repayment.
What are your options for debt consolidation?
Depending on your needs, there are four ways to consolidate your debt:
- Debt Consolidation Loan
A fixed-rate debt consolidation loan is one of the best ways to concentrate your debt into one monthly repayment. The money that you get from the loan will be used to pay off all your debt, and then you can pay back in installments over an agreed time period. Visit DebtConsolodationLoans.com to learn more about this option.
- Balance-Transfer Credit Card
If you’ve been having difficulties paying off your credit card debt, you can take advantage of a balance-transfer credit card, which offers 0% interest rates. Some credit card companies offer this type of promotion where you can transfer all of your debts into one card and you can pay it off during the promotional period.
- Home Equity Loan
A lot of people tap their home’s equity to pay off their credit card debt, which helps lower their interest rates. But financial experts advise against this option unless absolutely necessary because of its risks. While interest rates are much lower for this type of loan, you can also risk losing your home if you can’t repay the loan. Repayment is also longer and if your home’s value drops, you could end up owing more money.
- 401(k) Loan
This option allows you to borrow against your retirement savings with lower interest rates. You can borrow as much as $50,000 and use it to pay off your credit card balances. A 401(k) loan also has no impact to your credit score and is generally cheaper than credit cards. But like home equity loans, 401(k) plans are quite risky because you’re putting your retirement savings on the line. You may also incur penalties and tax consequences, especially if you don’t repay the loan on time.
How do you know that debt consolidation is a good idea?
Now that you know your options when it comes to debt consolidation, it’s time to determine if you should go for it or not. Generally, debt consolidation is a great idea if:
- Your credit score is still good enough for you to qualify for a debt consolidation loan or a 0% balance-transfer credit card.
- Your total debt is not more than 50% of your total income.
- You have consistent cash flow to cover debt repayments.
- You have a concrete plan to never be in debt again.
Debt consolidation is definitely a smart way to repay what you owe, but only if you do it right. Aside from making your payments on time, you should also find ways to manage your spending habits, so you don’t find yourself in the same hole again. It also makes sense to stick to the amount that you need to pay or even add a few more dollars to it. Making minimum payments on credit cards don’t only extend your repayment period; it also increases your interest rates. Finally, you should always have a plan to keep yourself from getting into debt again. Whether it’s being more conscious about your spending or keeping track of all your expenses, it really pays to be wiser about your finances so you can enjoy a debt-free life.
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