Some Americans have had such a positive experience with debt consolidation they want to (metaphorically) shout about it from the mountaintops. Others have had a less fruitful time with this strategy, oftentimes due to a mismatch between their expectations of outcomes and the reality.
The bottom line is debt consolidation can help borrowers simplify the repayment of debts as well as knock down the amount owed in interest/fees. But it’s not guaranteed to do so.
Following these best practices for working with a debt consolidation company will help you increase your chances of success.
Explore Your Debt Consolidation Options
Consolidation is a broad term for a family of different approaches to streamlining debt, each with its own pros, cons and requirements.
Here are a few of the most common methods of consolidating debts:
- Balance transfer credit card: Borrowers shift debt(s) from a high-interest card to a new card, typically with a zero-percent interest introductory offer. Then they pay down as much of this debt as possible while interest is on pause. After the introductory offer ends the rate typically bounces back to normal levels — and be warned, the special low interest rate almost never applies to new purchases.
- Personal loan: Borrowers qualifying for a low-interest loan from a bank or online lender can use it to pay off existing debts, then pay monthly installments on the loan until the obligation has been satisfied.
- Home equity loan: Homeowners may decide to borrow against the value of their homes in the form of a low-interest loan to pay off higher-interest accounts, most notably credit cards.
Factor in All the Costs of Consolidation
One pitfall to sidestep is overlooking the initial costs of consolidation — like fees and interest charges over time.
Transferring a credit card balance to a new card typically requires a fee between three and five percent of the amount transferred. While the best online debt consolidation companies offer competitive interest rates for qualified borrowers, they may also include origination fees between one and eight percent of the sum borrowed.
The interest rate for which you qualify also depends heavily upon your credit rating, with higher scores corresponding to lower interest rates and lower scores corresponding to higher interest rates. Some can be so high the consolidation process is costlier than paying down your debts on your own over time.
Perhaps the simplest way to figure out if a certain consolidation tactic will save you money is plug the numbers — the interest rate for which you’d qualify, loan length, monthly payment, fees and etc. — into an online calculator. Then you can compare the result against how much you’re currently paying to make sure consolidation will do you a favor.
Abstain from Accumulating New Debts
Accumulating new debts while consolidating your old ones can leave you worse off than where you started — like trying to satisfy a loan and new credit card balances at once. This is why part of debt consolidation success is coming up with a budget and a plan to avoid taking on new debts until your existing obligations have been wiped out.
Approaching debt consolidation companies with these best practices in mind will help you get the most from the process and know how to handle certain challenges along the way.