Content provided courtesy of USAA.
By Angela Caban
It’s time to pay the bills again. As you stare at the mountain of credit card statements laying in front of you, you’re both intimidated and mystified. All nine of those cards seemed like a good idea at the time; not so much anymore. There’s got to be a better approach to simplify your situation and get a handle on it all!
If you have been thinking about debt consolidation, here are some important factors you should know.
What is debt consolidation?
Debt consolidation is a type of refinancing that allows you to combine several different debts into a single account with a single payment. You could combine credit cards, personal loans or medical bills into a single bill that you pay monthly. Debt consolidation could lower what you pay in interest, help you pay what is owed faster and simplify your life.
Is debt consolidation, a debt management plan and debt settlement the same thing?
Before you move forward, you should know that there is a difference between debt consolidation, a debt management plan, and debt settlement. Here is a brief description of the other two:
A Debt Management Plan is a program used when you are working with a counselor who is helping you get a better handle on your debt. Typically, the counselor will work with you and your creditors to develop a budget and a repayment plan that allows you to repay your debts and save on interest and fees. You pay the counseling agency and they pay your creditors. This could be a good approach if you’ve got severe debt issues.
Debt settlement is when you contact your creditors to settle for a smaller amount than you currently owe them. This can also include trying to work with them on reducing interest rates and scheduling a payment or repayment plan. This approach can have tax implications and can also negatively impact your credit score.
How do I start with debt consolidation?
You should know there are various ways to consolidate your debt, and before looking into one, you should familiarize yourself with all options. Remember that everyone has a different debt situation and you should speak with an advisor on your military installation or a credit counselor from an organization like the National Foundation for Credit Counseling or a certified financial planner before moving forward.
Some debt consolidation options that you can use are: transferring credit cards to a lower rate card, an unsecured personal loan, a secured loan like a home equity loan or even a 401(k) loan. This will vary based on your specific situation.
What are the pros and cons to debt consolidation?
A big pro to debt consolidation is that many times you are able to save money in the long run by having a lower interest rate loan. Having one payment a month beats having payments to various creditors and with a fixed term loan you know when your debt will be paid off.
One con that you should think about is that if you don’t have good credit, you may not be able to obtain a good interest rate for your loan. In the long run, how much more money will you be spending to consolidate? If this is the case, then a consolidation/personal loan may not be for you, and you may have to consider another option. Another huge con is that if you consolidate and don’t fix your spending issues (if that caused the debt), you will only end up with the consolidation loan…and more credit card debt.