If you're feeling overwhelmed with credit card debt and loans, debt consolidation may be an option worth considering.
Getting into debt can feel like stepping in quicksand – easier to get into than out of. Maybe it starts with a credit card bill you don't pay off in full and before you know it, it quickly multiplies into three, four, or five more. As your debt grows, you may start to feel overwhelmed.
If you're wondering whether debt consolidation is worth it, there are many factors to consider. When appropriate, it can provide the breathing room you need to enable your first step towards taking control of your finances.
What is Your Situation?
Households in the U.S. carried monthly credit card debt in the amount of $466.2 billion by the end of 2019. The goal with debt consolidation is to exchange a handful of credit cards and personal loans, each with a different interest rate, for a single balance with one lower average rate.
If the bulk of your monthly income is going toward paying bills beyond your basic living expenses, it's time to come up with a plan. Your options include:
- Transferring balances to a zero or low-interest credit card
- Take out a personal loan
- Use the equity in your home
- Borrow against a retirement plan
Also, taking on a part-time job can help pay off debt faster.
1. You Must be Honest About Your Financial Situation
You'll need to be honest about your financial situation. Take an honest look at all of your outstanding debt and review the terms and conditions for repayment. How realistic is it you'll be able to make a dent in your debt?
2. Calculate Your You Debt
Calculate the total debt; this will help you see if it is a good idea to consolidate your debt. You may be surprised to learn your outstanding balances are more than you expect. A debt calculator makes it easier to determine how much you will pay in the long run if you continue to pay the minimum.
3. Can You Get a Lower Interest Rate?
Once you know how much debt you need to pay off, do some research to see if you qualify for any credit cards with zero interest and low (or no) transfer fees. A personal loan is another option to consolidate debt.
4. Consider Your Credit Score
One silver lining of getting out of debt is the impact it will have on your credit score. Debt consolidation is a good idea if the measures you take will help you pay down your debt – but consider that moving the balances off of credit cards onto a single loan can improve your credit score.
5. Debt Consolidation May Not Work
Although debt consolidation is worth exploring, utilizing the option may not work for everyone. If your debt to income ratio will remain relatively high, it likely won't help your situation. The interest rate and terms may not work in your favor for a fast resolution.
Drop the Debt
Whether or not debt consolidation is worth it depends on the amount of money you owe and your ability to repay your creditors. Getting out of debt requires a plan and commitment.