Combining many loans into one for the purposes of lowering interest and total payments is known as debt consolidation. For those looking to simplify and improve their financial lives, consolidation can provide relief for the mind as well as the wallet. Don't count on being able to consolidate your debts onto one credit card, because loans always come with limits. However, there are many ways to consolidate debt, and there is a solution for you.
Credit Card Consolidation Basics
Credit cards often have high interest rates and fees for late payments and going over the limit, and paying these loans quickly ensures you'll save the most money as possible. If your credit is good, you may be able to combine these credit card bills into one low-interest payment.
In this arrangement, the credit card company pays your outstanding high-interest bills and combines them into one new credit card loan. Promotional or "teaser" rates, such as "0 percent financing," are offered, but usually for a very limited period of time, often six months to a year. If you are able to pay the balance completely in this time frame, credit card consolidation is a terrific way to pay debts.
Credit Card Consolidation Limits
Read the fine print, because you may only be able to use a portion of your new credit limit for consolidation purposes. The creditor will want you to use the card for purchases, which may be subject to higher interest rates. Be advised that you may not be able to utilize the cash advance benefit, either. As long as you stay beneath the dollar limit for consolidation, you may consolidate as many loans as you wish into one new payment.
Debt Management Limits and Criteria
If you decide that credit card consolidation is not for you, consider a debt management plan. In a "DMP," there is no limit to the dollar amount or number of debts you can consolidate. Contact the National Foundation for Credit Counseling. Their certified counselors will give you a free budget consultation, and enroll you in a DMP, which can lower your interest rates and payments, eliminate fees and collection calls, and help you reestablish good credit. In a DMP, the consolidation agency collects one monthly payment and distributes the negotiated payments to your creditors. It is not a loan, and your balances will be paid in full within five years.
Home Equity Loan Limits and Criteria
If you have equity in your home or auto and decide that a new credit card or a DMP is unattractive, try an equity-based consolidation loan. The limit on these loans is determined by the amount of equity you have in the asset. Be advised that your lender may want you to retain a portion of your equity, so you won't be able to use the entire amount. You must have a good credit history to qualify, complete with on-time payments.
Risks
All consolidation loans require discipline. Don't run up balances on the old cards after you've paid them using a new loan. This is especially true of home equity loans, since you risk losing the asset if your default on the loan.
With DMPs, the lenders may opt to notify the credit bureaus that you're participating in a credit counseling plan, which may lower your credit score. However, participation in a DMP is preferable to missed or late payments.
Do your homework, think carefully about your behavior and the risks, and soon you'll be enjoying the benefits of living debt-free.
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