Before you can forge ahead on addressing your debts, you have to decide which overall strategy would work best for you. In this vein, you may have heard about debt consolidation — an approach to eliminating moderate debt that aims to reduce both the hassle and the expense, usually by streamlining several debts into one.
Deciding consolidation is the way to go and is a great first step, but from there it’s still up to you to choose which form of debt consolidation is best. The answer will depend on a variety of factors, from how much debt you’re trying to bundle to which option is most cost-effective based on your credit standing.
Here’s more information to help you get closer to figuring out which form of debt consolidation best suits your needs.
Option #1: Consolidation Loan
The first thing many people think of when they hear consolidation is a loan. Say you have $5,000 spread out between 4 credit cards. Rather than continuing to make four monthly payments on each high-interest balance, a single loan could zero out those accounts — leaving you with just a single medium- or low-interest loan to worry about.
Strong candidates for debt consolidation loans generally:
# You have a good credit score (usually 690 or above, although there are bad-credit options available as well).
# You have a steady stream of income that will allow you to stick with loan repayment for two to seven years.
# You can commit to avoid running up more credit card debt in the wake of the loan.
Check in-person and online lenders to see how you’d fare given your credit and income standing, and take advantage of a consolidation calculator to make sure you’ll really save money this way before jumping in.
Option #2: Balance Transfer
Could you feasibly pay off interest without a loan if you could press pause on interest for a while? Then a balance transfer may be right up your alley.
Moving one or more existing balances to a new card with an interest-free intro period gives you a certain amount of time in which to work down your balance sans compounding interest. Just be aware your interest rates will jump back up after the promotional period, and there are usually transfer fees involved.
Option #3: Debt Management Program
Are you struggling to stay on top of your monthly payments at the moment? According to a report – debt consolidation programs may be a viable solution for borrowers in this tricky position.
Also known as debt management programs, these plans involve working closely with a credit counseling agency to negotiate better repayment terms amongst your creditors. You will be responsible for making one lump payment to whichever agency you work with rather than paying your creditors directly.
Debt management programs do charge either front-end fees, monthly maintenance fees or both, but these costs may be offset by creditors agreeing to lower your interest rate or give you a break on late fees as long as you’re faithful to the terms of the program.
Option #4: Home Equity Loan
It’s a well-known fact home loans tend to have lower interest rates than credit cards, right? Homeowners may decide to take advantage of this fact, borrowing against the equity in their home to pay off their more costly revolving debts.
Of course, since your home serves as collateral, it’s absolutely crucial you have a plan to pay back a home equity loan in full.
What form of debt consolidation is best for you? It depends on how much you owe; how solid your credit score is and other factors like those outlined above.