Is Now the Time to Consolidate Your Debt?

Interest rates hit a new low, which has led many to consider consolidating their credit card debt to save money. However, each person must evaluate their current financial situation, how much it will cost to consolidate, and whether they will change their spending habits before making this move. What should a person consider when deciding if now the time to consolidate is?

New Lows

Men and women rarely pay attention to what the Federal Reserve is doing. They only see the result when the news reports on low mortgage rates and things of that nature. However, a cut in the short-term interest rate could lead to a person saving money on their debt, which is why actions taken by this government entity need monitoring. Merging debt isn’t a step a person should take unless they can get a lower interest rate, save money, and make only one payment each month to simplify their finances. National Debt Relief helps individuals find the right financial product for their unique situation.

Consolidating debt often provides the consumer with a boost in their credit score after a short period. In fact, TransUnion recently reported seven out of ten consumers who merged their debt saw their credit score improve by over 20 points. Those with a VantageScore under 720 saw the biggest jump. However, each debtor must consider all debt consolidation options to find the one that best meets their needs. Balance transfer credit cards and personal loans remain the most common. What are the advantages of each and the drawbacks?

Personal Loans

Personal loans come in the form of unsecured loans obtained through a bank or other lender. Men and women use these loans to make a big purchase or consolidate high-interest debt. When a person uses the loan to pay down their debt, they get a loan and use the funds to pay off their credit cards and other debts. They then put all the focus on paying the loan balance. TransUnion reports consumers who take out a personal loan for this purpose pay nearly 60 percent of their credit card debt, bringing the average balance down considerably.

Consumers must shop around for the best loan. Personal loans don’t always offer a better interest rate, especially when a person has fallen behind in their payments and this has negatively impacted their credit score. This individual might find lenders deny their application for a personal loan or they get a loan with an interest rate higher than what they are currently paying on their credit cards. For example, a person with a credit score below 680 might find they cannot get a personal loan with an interest rate of under 16.97 percent. As a result, they might find they aren’t saving any money by making this move.

Several factors play a role in the rate the person pays. The credit score serves as one, but the lender also takes into account the length of the loan. In many cases, shorter loan terms come with lower interest rates. A loan that will take over three years to pay in full will probably come with a higher rate, and consumers must recognize this.

Most loans, including low-interest-rate ones, come with fees and consumers must factor this into the equation. Many lenders charge an origination fee with each loan they provide, application fees aren’t uncommon, and lenders might impose other fees the consumer must know about. When the lender adds the fees in, the savings likely won’t be as great as the consumer expected. Some men and women might find they would do better to continue paying on their debt as they have been.

Fees imposed by lenders typically run between one and eight percent of the loan amount. For example, a $20,000 loan could come with anywhere from $200 to $1,600 worth of fees above and beyond the requested amount. Learn about any fees the lender will impose to see how much you will save by going this route.

Balance Transfer Credit Cards

Certain individuals choose to apply for a balance transfer credit card, one that allows them to move the money owed on their current cards to a single card with a lower interest rate. When comparing balance transfer cards, look for those with no balance transfer fee and a zero percent introductory interest rate that lasts for a minimum of one year.

When they select this method, the borrower must make every payment on time. A single missed or late payment voids the introductory rate and leaves the borrower paying interest on the entire balance. Review the fine print of each card under consideration to learn which offers the best terms and conditions. A failure to make timely payments could leave the borrower further in debt. Fortunately, debtors find they can take certain steps to make certain this doesn’t happen.

Set up automatic payments so there is no worry about missing a payment or sending it in late. Another option involves setting calendar reminders every month to ensure they make the payment.

Consumers need to be aware of the drawbacks associated with this method. Individuals with a high debt load might find that they need to get multiple balance transfer cards to move their debt to cards with lower interest rates. This somewhat defeats the goal of consolidating, as they must still make multiple payments.

If you select this option, don’t cancel the cards that had the debt. Keep them open to improve your credit utilization ratio. However, do not use these cards until you have paid the balance transfer card in full. Doing so could lead to additional financial issues, and nobody wants this. Additionally, don’t charge items using the balance transfer card is paid in full. Reserve it for the transferred items and pay it down as quickly as possible. Men and women who do so find they obtain debt relief in a shorter period.

Prepare for the Future

In addition to merging debt, consumers need to establish an emergency fund. This cash reserve helps to ensure additional credit card debt does not accumulate. Use these funds only in a true emergency, not for something you see and want right away. Experts recommend having anywhere from three to six months of expenses in this fund. However, individuals with overwhelming debt find this amount to be daunting. Start by putting $1,000 aside for emergencies. Once this money is in place, focus on paying down debt and adding a little to the fund each month. Over time, the total amount in this account will increase, giving the debtor peace of mind.

Debt consolidation benefits many individuals. However, the right method must be selected. Consider the pros and cons of each, select the method you think works best for your situation, and you’ll be on your way to a better financial future soon.