How to Consolidate Your Debt

A consolidation loans is a loan, generally taken out by college students upon graduation, which is used to pay off various student loans that you have accumulated during your years as a college student. However, a consolidation loan is not restricted only to student loans. In other words, you can take out a consolidation loan for your regular debts (such as credit card debt).

The effect of a consolidation loan is that upon consolidation you have to pay back only one loan (the consolidated loan) instead of the numerous loans that the graduate took out during college or the various debts that you have as a result of credit cards. Make no mistake, the amount of the debt that you owe does not decrease. The only change that occurs is that you now have to make only one payment instead of several. Additionally, because after you consolidate you have to deal with only one company, your loan payments and interest rate are both lower.

Debt consolidation can offer many great benefits, such as a lower monthly student loan and credit card payments, as the case may be, reduced interest rates, the prevention of being assessed late and over-the-limit fees, and faster debt reduction, to name a few. However, there are also some disadvantages that accompany debt consolidation. In regard to consolidation loans for credit cards, you may have a freeze of your credit using privileges, closed credit accounts, and consolidation fees. Knowing how to weigh the positives against the negatives and becoming completely informed (or as well informed as possible) about consolidation are two important factors you need to consider before making a decision as to whether or not you should consolidate your student loans or your credit card debt.

The easiest way to consolidate your loans, whether they are student loans or credit card debts, is by contacting a debt consolidation company. Keep in mind that there are companies that deal exclusively with student loans and there are companies that deal exclusively with credit card debt. Therefore, make sure that you have contacted the correct company for the product that you need.

Once you have chosen a company, you will have to give the company all of your loan information for the loans that you want to consolidate. Basically, the company will either pay off all of your loans and then you pay back that company at a particular interest rate, or the company will talk to all of your creditors and work out a lower monthly payment that is combined with all of your other monthly payments so that a total lump sum payment is calculated that you pay each month.

That is the gist of what you have to do. Keep in mind that the entire process is relatively simple, but it can be tedious. Therefore, be patient and you will be rewarded.

How to Lower Interest with Credit Card Consolidation

Depending on what kind of credit cards you have, you may be paying an extraordinarily high interest rate. For example, credit cards offered on college campuses tend to have higher interest rates then credit cards offered at banks. Additionally, "student" credit cards tend to have higher interest rates than traditional credit cards. This is generally true because college students and young adults are just starting to establish their creditworthiness. As such, to offset the risk of giving credit to somebody without an established credit history, credit card companies charge higher interest rates and annual fees for these cards. The interesting thing is that you probably still use some of those cards today even though they are inferior to other credit products available to you.

It is important that you do not close these high interest credit card accounts (there is an exception discussed below). Closing a credit account will negatively affect your credit score. As such, in order to save money and your credit score, you should consolidate your debt onto one low interest credit card.
Consolidating your credit card debt onto one low interest credit card can save you money in more ways than one.

First on all, your old credit cards or your high interest cards carry a far higher interest rate than do other, easy to obtain credit cards. Additionally, many credit cards offer zero percent interest for up to one year on balance transfers. Therefore, if you transferred your debt from your high interest card onto a zero percent interest card, you would save a lot of money in interest payments, and you would pay down your debt faster.

Annual fees usually accompany high interest credit cards as another mechanism to offset the risk of the credit card companies. Annual fees are pointless. The only time a credit card should have an annual fee is if it is a charge card (if it is a charge card, you pay no interest and therefore, an annual fee is the only way for the company to make money). As such, if your high interest credit card has an annual fee, you should call that credit card company and see if you can get that annual fee eliminated.

If the credit card company is unwilling to accommodate you, transfer your balance on that card to a zero interest card and close the account. By closing the account, your credit score will take a small hit. However, this small hit is easily offset by maintaining a good history with the new zero percent interest card. Additionally, you will no longer have the expense of an annual fee.

Save yourself the expense of high interest and annual fees by consolidating your debt onto a low interest or no interest credit card.

Pros and Cons of Debt Consolidation

Debt consolidation can offer many great benefits, such as a lower monthly credit card payments, reduced interest rates, the prevention of being assessed late and over-the-limit fees, and faster debt reduction, to name a few. However, there are also some disadvantages that accompany debt consolidation, such as a freeze of your credit using privileges, closed credit accounts, and consolidation fees. Knowing how to weigh the positives against the negatives and becoming completely (or as well informed as possible) informed about consolidation are two important factors you need to consider before making a decision as to whether or not you should consolidate your credit card debt.

The first factor you should consider is the amount of your credit card debt. Many consolidation companies require that you have a minimum of $5,000 worth of credit card debt before you are allowed to participate in the program. Some companies require at least $10,000 worth of debt. The point is, if you have only a relatively small amount of credit card debt you can probably work the problem out by yourself. Additionally, because these debt consolidation companies charge an “administrative” fee every month, the longer it takes you to get out of debt equates to more money for the debt consolidation company. Therefore, they are not willing to help people who are only $1,000 or $2,000 in debt because it is not profitable to the debt consolidation company.

It is true that the debt consolidation company will combine all of your monthly debt payments into one monthly payment that you pay to the debt consolidation company who then distributes the payment to the various credit card companies. Additionally, it is true that the debt consolidation company will work with your creditors to lower the interest rates on your outstanding debt accounts. However, what they do not tell you is that sometimes credit card companies do not change the payment due date for your account. Thus, if your single monthly payment to the debt consolidation company is due on the 5th of the month, but one of your credit accounts is due on the 4th of the month, you may incur a late fee. Make sure that this situation is remedied before you start making payments to the debt consolidation company.

One of the negative aspects of debt consolidation is that your credit score will be lowered because all of your credit card accounts that are in this program will be closed. Closed credit accounts lower a credit score. Additionally, the credit accounts that are the subject of the debt consolidation program will be frozen. As such, you will not be able to use your credit card for any of these accounts. Therefore, you should choose carefully which accounts to consolidate. Do not leave yourself without an emergency (and I emphasize “emergency”) credit card. This does not mean that you keep your credit card for your favorite department store because there is a new clothes line coming in next week. This is not an emergency, and this way of thinking probably got you into the credit debt mess that you are currently facing. I suggest that you consolidate the cards with the highest amount of debt and with the highest interest rate. By doing this, you will be saving the most money.

Do your homework and do some comparative analysis if you are considering debt consolidation. Choose a company that you are comfortable with, that is easy to contact, and that has the lowest, or, if possible, no fee. If you are not comfortable with credit card debt consolidation, try solving the problem yourself. Contact the credit card companies and see if you can negotiate a lower interest rate or monthly payment. The point is, you have to take action to resolve your credit debt situation before it reaches the stage where bankruptcy is your only viable option.


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