Reduce your interest rates and monthly payments
Debt Consolidation in Action – a case study from New Jersey.
This debt consolidation story comes from Paul in Keyport. With over $30,000 in credit card debt, Paul paid over $1,200 each month just on those bills.
Consolidated Credit negotiated with Paul’s creditors to reduce his interest rates so it would be easier to eliminate his debt. The program reduced Paul’s monthly payments by over 50 percent.
He could get out of debt in less than five years instead of taking more than 15. Paul saved over $12,000 in interest charges.
And he had this to say about the program: “Five Stars. The program did exactly what the counselor promised and I couldn’t be happier. Consolidated Credit help me save my credit and a lot of money in finance charges.”
What is debt consolidation?
Debt consolidation is the process of combining multiple debts into a single monthly payment. Instead of worrying about multiple bills to pay off each month, you only have to worry about one.
In most cases, you can only consolidate similar types of debt together. In other words if you have credit cards and student loans to consolidate, they get consolidated separately. You get one plan to pay off your credit cards and another to repay your student loans.
Aside from simplifying your bill payment schedule, consolidation usually focuses on achieving one of two goals (or both):
- You reduce or eliminate interest charges applied to your debt
- You lower the monthly payments so it’s easier to manage the debt
When it comes to credit card consolidation, you usually want to try and accomplish both. However, for things like federal student loan consolidation, interest rates are not based on your credit score. As a result, most consolidation plans focus on making it easier to repay what you owe.
What types of debt can I consolidate?
Unsecured debt is the most common. That includes your credit cards, gas cards, store credit cards and in-store credit lines, and unsecured personal loans. In some cases, you may also be able to consolidate unpaid medical bills and payday loans with your unsecured debts.
Most of the information you see below focuses on unsecured debt consolidation. However, there are two other types of debt that may be consolidated:
- There are several ways of consolidating student loans, whether your loans are private or federal. You can read more in Consolidated Credit’s guide to Student Loan Consolidation.
- It’s also possible to consolidate multiple years of unpaid IRS income taxes in a single repayment plan. This is known as an Installment Agreement (IA). If you owe back taxes, consult with a certified tax professional about this option for consolidation.
Comparing options to consolidate unsecured debt
There are 3 basic options for consolidating unsecured debt like credit cards:
It’s important to note that the first two options offer do-it-yourself consolidation. While people often prefer DIY solutions, make sure to evaluate these options carefully. There are certain increased risks that come with consolidating debt on your own.
Is consolidation the right choice for you?
This is not the only solution you can use to eliminate debt. However, it is one of the best solutions available to lower monthly debt payments and save your credit.
Where do I go to consolidate?
It’s not always necessary to go through a third party to consolidate your debt. For DIY debt consolidation solutions, you simply work with a lender or creditor to get the financing you need for consolidation. However, the management of the plan rests solely with you. Only assisted debt consolidation requires third-party help all the way through the program.
- Consolidation Help Guide: Where to go to start your consolidation plan
- Comparing Companies: How to choose a reputable program provider
Specialized options for consolidation
Debt consolidation can work for more than just credit cards. Other unsecured debts, such as payday loans and medical debts, can be consolidate as well. There is also specialized consolidation for student loan debt and debts held by military Service Members and Veterans. The following articles can help you explore these solutions:
- Consolidate Medical Debt: How to consolidate unpaid medical bills that have passed to collections.
- Payday Loans and Consolidation: It is possible in some cases to consolidate payday loans; learn how.
- Military Consolidaton Guide: Explore specialized debt consolidation options that are only open to Service Members and Veterans.
- Student Loan Consolidation: Learn how to consolidate private and federal student loan debt to accelerate repayment.
10 Do’s and Don’ts of Debt Consolidation
- DO an evaluation of two costs as you consider each option for consolidation:
- Monthly cost
- Total cost (interest charges + debt payoff)
- DON’T confuse debt settlement with debt consolidation. The former causes credit damage because you eliminate debt for less than the full amount owed; consolidation pays what you owe in-full in a way that works for your budget.
- DO what you can to achieve the lowest interest rate possible – in other words, aim for zero but recognize that anything under 10% will usually provide the benefit you want.
- DON’T agree to pay any fees until some actual work is done. This applies specifically to assisted consolidation through something like a credit counseling agency.
- DO your homework and review ALL options for debt consolidation thoroughly before you choose the one that’s right for you.
- DON’T consolidate unless the new plan will allow you to pay off your debt in-full within 5 years (60 payments) or less.
- DO your best to pay off the debt as quickly as possible – if your income increases and you can make larger or extra payments, do it!
- DON’T start spending money on existing or new credit cards until you eliminate the consolidated debt in-full.
- DO a thorough credit report review once you complete your consolidation plan. All account statuses should be current and balances should be zero.
- DON’T worry about credit damage. If you consolidate correctly and stick to your payment schedule then the effect on your credit should be neutral or positive.
See How Debt Consolidation Works in Action
Let’s say you have 5 credit cards:
- The first card has APR at 15% and a total balance of $1,000
- Card #2 has 18% APR and a total balance $5,000
- The third card has 19% APR with a total balance $3,000
- Your highest balance of $7,000 in on the fourth card at 21% APR
- The last card has APR 22% and a total balance of $5,000
In total, you need to repay $21,000 of debt. If you stick diligently to the minimum payment schedules, the total cost and time to pay off is high:
- 97 months to repay, total interest charges $636.94
- 273 months to repay, total interest charges $9,923.13
- 239 months to repay, total interest charges $4,503.57
- 396 months to repay; total interest charges $15,374.09
- 390 months to repay; total interest charges $12,591.32
On standard minimum payment schedules, your total monthly payments would be around $525. Total interest charges come in at $43,389.05. So, the interest charges are more than double of the actual debt you owe. Even worse, it would take 33 years for you to be completely debt free. That’s if you don’t make another charge from now until you reach zero.
Now let’s consider some example of what would happen if you use one of the three most common types of debt consolidation:
What happens with a balance transfer?
If you have excellent credit, let’s say you qualify for a balance transfer credit card with a long introductory period. The longest periods currently available are 21 months. In this case, you want to pay off the debt in-full within those first 21 payments. Otherwise, once the standard interest rate kicks in, you’re back to the same bad situation with debt.
To pay off the balance in-full with $21,000 in debt, you would need to increase the monthly payment to $1,000. Essentially, you would need to almost double your monthly obligation to make this a viable option for debt relief. However, the total cost would be $21,000 because there aren’t any interest charges to apply.
What about an unsecured debt consolidation loan?
You also need good credit to make this a viable option. The better your credit score, the lower the interest rate applied to your debt. Again, let’s say you have excellent credit. You would need a loan that financing $21,000 to pay off all your credit cards.
If you take out a 5-year $21,000 loan at 6% APR, the monthly payments would be around $405.99. This would provide some relief for your budget, since it reduces the monthly payment by roughly 23%. You’d be out of debt in 5 years or 60 payments. Total interest charges would be $3,359.33 over the life of the loan. That makes the total cost $24,359.33.
If you have the credit score to qualify for this option, it might be a good choice for your budget. You should compare it to the cost of a debt management program before you decide which option is best in your particular financial situation.
What could I expect with a debt management program?
Every debt management program is different. Your monthly payment depends on what you can afford in your budget. The interest rate you pay depends on what our credit counseling team can negotiate with your creditors. But here are some examples of people who came to Consolidated Credit with around $21,000 in debt:
- For Patricia from Tucson, Arizona, our team negotiated an average interest rate of 5% APR
- Her monthly payments dropped from $840.76 to $513
- Her time to payoff reduced to 3 years, months
- She saved $9,089.19 in total interest charges
- For Taylor from Miami, Florida, the team negotiated his interest rates down to 8.20% APR
- His monthly payments dropped from $857.76 to $506
- He paid off the debt completely in 4 years
- He saved $8,782.74 in total interest charges
In general, clients complete a debt management program in 36-60 payments. Creditors typically reduce a client’s interest rates to less than 10%. The program decreases your total monthly credit card payments by around 30 to 50%.