Consolidate Debt: Overview

Struggling to pay off high interest debts from medical expenses or credit cards can be absolutely overwhelming. Of course, there are many ways to tackle your debt, but which one is best for you? One of the more common suggestions you may hear is to “consolidate your debt”. But what that exactly means can be confusing.

Simply put, consolidating debt means you combine all of your debts into one. It’s important to understand that consolidating your debt and paying off your debt are two different things. The main benefit of consolidation isn’t to be out of debt. The benefit with debt consolidation is that paying off your debt becomes a simpler task that could also save you money (you are making fewer payments each month and paying less in interest). Debt consolidation does NOT mean you are paying off your debt. The total amount of your debt will remain the same. There are many ways to consolidate debt, here are a few of the most popular options:

All of these are proven methods, but before you choose the one you want to pursue, it’s best if you understand the pros and cons of each.

1. Balance Transfer Credit Cards

You may have seen offers for balance transfer credit cards that seem like great options. A credit card balance transfer allows you to move debts to a low-interest or, if you’re eligible, 0% credit card. Usually this will be only for balances from other credit card issuers and not the issuer with the offer promotion. Sometimes the balance transfer promotion will include an opportunity to transfer debts that aren’t on credit cards, such as a medical bill. This can be a helpful way to tackle such debt—as long as you’re careful.

Pros Cons
  • Moves your debt balance to a lower interest rate
  • Simplifies tracking of debt balance and payments
  • Maintains same amount of debt
  • Requires balance payment within a set time frame to fully take advantage of the special low rate. Once this limited time expires, then the interest rate rises, usually to a relatively high percentage
  • Doesn’t address the cause on of your debt

Before moving forward with a credit card balance transfer, make sure to:

  • Select a card with no annual fee.
  • Read the fine print on length of time for the special interest rate, plus all associated fees.
  • Calculate the balance-transfer fee. Typically this is a percentage of the full amount, so the more debt you have, the higher the fee.
  • Ensure you can pay off the balance before the special rate expires.
  • Put away old and new cards and stop charging once you transfer debts.

2. Debt Consolidation / Personal Loan

With a personal loan or debt consolidation loan, you can pay your creditors off in one fell swoop. However, it’s important to note that you are not actually paying off your debt. A loan can simplify your finances with a predictable single payment each month and help you make headway on reducing the entire amount of your debt, as your loan payments will apply to both the fixed interest and principal.

While the interest rate on a loan is fixed, how low that interest rate could be depends heavily on your credit health. Average interest rates on personal loans are 14%–18%, yet these rates can vary widely from as low as just over 4% annually for people with exceptional credit and up to 25% or higher for people with poor credit. Unless you can qualify for a loan at an interest rate that is lower than the average interest rate you are paying on your debts, a debt consolidate loan probably does not make financial sense.

It’s important to shop various lenders to find the best loan terms and interest rate. But when you do, note that each lender will probably “pull your credit” to determine what rate to offer you. This means they will examine your FICO score, which could impact your score. However, FICO ignores multiple mortgage, auto, and student loan inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won’t affect your scores while you’re still shopping for the best rate.

Pros Cons
  • Lets you become current with your creditors
  • Lowers the interest rate on your debt
  • Doesn’t change the amount of debt owed
  • Doesn’t solve the core reason you got into debt

3. Debt Settlement

Another way to consolidate debt is by enrolling in a debt settlement program like the one we offer here at Freedom Debt Relief. It consolidates your debt because instead of paying all your creditors each month, you will make one, affordable payment into the program each month.

Technically, these monthly payments are not payments. They are actually deposits you make into a Special Purpose Account that you control. Your goal is to continue depositing money into this FDIC-insured account until the amount becomes large enough that Freedom Debt Relief can approach your creditors and negotiate a lower payment on your debt.

Once the balance of your account increases to be large enough, we begin contacting your creditors or representatives of your creditors to negotiate down the amount you owe. Then, you begin to pay that reduced amount until the debt is considered paid in full.

Debt settlement may be right for you if you’re struggling with $15,000+ in debt, want a low monthly cost, want to resolve your debt faster than making minimum payments, and/or are worried that bankruptcy may be your only option.

Freedom Debt Relief is proud to be the leader in the debt settlement industry, having resolved more debt than any other company in the nation—over $9 billion as of June 2018. We look at your debt, your situation, and your goals to create a custom program that offers a great chance for success. And of course, we do not charge any fees until a debt settlement has been negotiated.

And even though all debt settlement programs charge a fee, the savings Freedom Debt Relief could provide by significantly reducing the amount you owe creditors should still help you get out of debt faster and for less money on the whole.

Pros Cons
  • Great credit is not required
  • Debt amounts can be significantly reduced
  • Clients can become debt-free when they complete the program
  • It could help teach better money habits
  • Can impact your credit score negatively
  • Fee assessed for negotiation services

After the full settlement amount is paid on each account, your creditors should report to the credit rating bureaus that your accounts are either settled in full, settled, paid, paid by settlement, or settled for less than the full amount.

Regardless of the term used, you no longer owe on any of your enrolled debts once they are settled. Your debt is behind you!

4. Cash-Out Refinancing

If you own a home and have enough equity in your home, you may be able to take out a home equity loan or line of credit and use the money to pay off all of your debts at the same time. Or, you can refinance your home for more than the mortgage balance and, at closing, use the extra cash to pay off your debts. Either way, you will still be paying your debts, yet hopefully for a significantly lower interest rate. This can offer a huge savings in what you’d pay on interest over the life of the debt.

Be aware that using your home to pay off debt can be very risky. If you can’t make the payments, then you will be at risk of foreclosure.

Pros Cons
  • Lowers the interest rate on your debts
  • Simplifies your debts into a single payment with your mortgage
  • May add additional years to your mortgage
  • Doesn’t adjust the amount of debt owed
  • Doesn’t address how you got into debt

Keep in mind that by refinancing, you may add years of mortgage payments. Yet by doing either of these methods, you’ll move high interest debt to a lower interest rate via your mortgage—and the interest is tax-deductible!

5. Debt Management Program

If you are having trouble paying your bills each month and need moderate debt relief, credit counseling and enrollment, for a fee, in a debt management plan (DMP) could be an effective option. Credit counseling does not reduce the amount of debt you owe. Instead, a credit counselor can set up an affordable payment plan via the DMP and offer lower interest rates that have been pre-negotiated with your creditors. This lets you focus on one interest rate and one payment per month, which can be helpful if you are struggling with lots of accounts that have high interest rates.

Credit counseling will work with enrolled creditors to try to lower your interest rate—this is called a concession rate. Then the DMP will help you have a new monthly payment amount based on the concession rates. By utilizing a credit counseling service with enrollment in a DMP, you’ll make a single monthly payment. You will pay the DMP service and they will use this money to pay your creditors. You will pay back 100 percent of the debt, plus interest. Keep in mind that this debt consolidation option can save you money, because the interest on the debt should be at a new lower rate than the average of your previous interest rates.

Pros Cons
  • Can reduce interest rates on the amount owed
  • Could make you debt-free upon completing the Debt Management Plan
  • Could teach financial discipline and good habits
  • Principal debt not reduced
  • Credit card accounts closed
  • Requires a monthly fee for the credit counseling service

A DMP could help protect you from creditor collection actions and could prevent you from becoming delinquent. However, if you are currently struggling to make minimum payments and aren’t comfortable with the fact that credit counseling could require you to pay even more each month, then this may not be the right option.

Selecting the Right Solution for You

Whichever strategy you choose, know that you are not alone in your search! Millions of Americans are struggling with high interest rates, stagnant wages, and unstable employment, but not all of them are actively looking for a solution like you are right now. So keep going. You are doing the right thing by looking for the answer to your debt problem, and Freedom Debt Relief is here to help any questions about debt relief you may have.

No matter which debt consolidation solution you choose, remember that if you want to avoid getting into deep debt again, you need to take a look at how you got into debt in the first place. And before you consolidate debt with a personal loan or transfer debt to a different credit card, evaluate your budget and your habits. Do you have a strategy to avoid getting into the same problem again?

If you want to avoid getting into deep debt again,
you need to take a look at how you got into debt in the first place.

You may need to carefully evaluate your financial goals and priorities, learn to create and use a simple budget, plus create a solid emergency fund. These steps may require reducing expenses, changing spending habits, and/or earning more income through an additional job.

There’s no perfect for solution for debt consolidation to help pay off debt—luckily there are lots of opportunities to find a plan that best fits your situation. If one debt consolidation plan seems like it might work for you, then dig deeper. Debt will not go away on its own, yet by taking these steps you could ease debt stress and find a way pay off debt and eliminate it from your life.

If you need help understanding the differences between these options, let a certified debt consultant explain your debt relief options  and take one more step toward defeating your debt.

Learn more about debt consolidation

See how it compares to other options

Is it a good idea to consolidate your debt?

Take a look at the pros and cons