Is Debt Consolidation Right for You?
Do you want to retire early, create a sizable emergency fund, or hit another savings target? Multiple high-interest rate debt payments might interfere with those plans. But debt consolidation could make debt more manageable and help you achieve your financial goals.
What is Debt Consolidation?
Debt consolidation is a way to combine multiple debts into a single loan, typically at a lower interest rate. This simplifies your debt repayment plan, which makes it easier to stay on track and pay off your account balances sooner.
Two Types of Debt Consolidation
Debt consolidation loans and balance transfer credit cards are the two main types of debt consolidation available to eligible consumers. Let's take a closer look at each.
Debt Consolidation Loans
Most financial institutions offer debt consolidation loans. Eligible borrowers receive a lump sum of cash that can be used to immediately save money and simplify debt payments. For example, a SAFE personal loan can pay off multiple debts. Because the interest is typically lower than the original rates, more money goes to paying the loan instead of finance charges.
Credit Card Balance Transfers
Balance transfers are another type of debt consolidation that can be used to pay off multiple debts. With this option, you can transfer balances from several credit cards (and other debts) to a single card with a lower interest rate. For example, SAFE offers many perks for new credit cardholders that could help you save big in interest. And, if you haven't seen our SAFE Cents video on this topic, watch it here!
Are There Other Options?
The short answer is: Yes, there are. Debt consolidation loans and lower-interest rate balance transfer credit cards aren’t the only ways to re-establish dominance over your debt. You can try to settle your debt with each creditor. Settling debt involves negotiating with creditors to reduce the total debt you owe. However, this option is often pursued as a last resort since it can negatively affect your credit score. And, there could be impacts to taxable income when settling debts for less than the amount owed.
Another debt management option is credit counseling. Credit counseling agencies usually employ credit counselors, and one will work with you to create a debt-elimination strategy. Keep in mind, like other options mentioned, some of these strategies could impact your credit score. They typically involve:
Setting up and agreeing to stick to a household budget
Working with a designated counselor who negotiates with your creditors to lower payments.
Making monthly payments to the credit counseling agency, which then sends them to the creditors on your behalf
These alternatives are ideal for people who do not wish to pursue credit-based options for debt consolidation. In fact, SAFE offers complimentary financial counseling services to all its members.
Which Debt Consolidation Option Is Right for You?
A debt consolidation loan may be the best choice if you have good credit, as it could help you save money on finance charges and streamline bill payments. If your credit score isn’t the best, a balance transfer may be a better option, as you may still be able to secure an interest rate lower than those of your current credit cards.
Debt consolidation can be an excellent way to make debt more manageable while helping you get back on track financially. You can reduce your payments and pay off debt faster by selecting an option that matches your goals and lifestyle. Exploring debt consolidation options could be the first step toward becoming debt free!