Manage your debts: Consider debt consolidation

Having multiple debts, like credit cards, personal loans, and payday loans, can be challenging to manage due to high interest rates and fees. If you are struggling to keep up with payments on multiple loans or credit cards, consolidating your debts into one payment with a lower fixed rate can help.

There are two common options for consolidating high-interest debts. You can transfer your credit card balances onto one credit card with a balance transfer. Or you can get a personal loan for debt consolidation and use it to pay off your balances. There are other ways to deal with credit card debt, but either way, consolidation can help you save money and pay off your debt faster.

To qualify for most balance transfer credit cards, especially those that come with attractive 0% introductory APR offers, you typically need to have good to excellent credit (this usually means a FICO score of 670 or higher). While debt consolidation loans may work for customers with less than good credit, borrowers with higher credit scores usually qualify for lower interest rates.

Certainly, there are other ways to consolidate debt, including taking out a home equity loan or borrowing from your retirement savings, but these options involve more risk to your property and savings.

How do debt consolidation loans work?

Personal loans are commonly used to consolidate debts. You can apply for a personal loan online, over the phone, or in person. Loan amounts commonly range from $1,000 to $50,000, although some lenders offer more, with loan terms ranging from 12 to 84 months. It depends on your state of residence, credit history, income, and the lender’s underwriting criteria.

Consider those lenders that offer pre-qualification tools. This usually involves filling out a short application form with basic personal information to get an idea of your eligibility and terms without affecting your credit.

Once you’re pre-qualified or decided on a lender, you still have to fill out a full loan application form, providing all requested information. Lenders typically require documents to verify your identity, income, assets, and overall financial stability. When you take out a new loan or credit card to consolidate debt, the lender will pull your credit, which will temporarily knock a few points off your credit score, but you may improve it over time as you make timely payments.

After being approved, you receive all the funds at once into your bank account, or the lender can pay your creditors directly. You, in turn, pay off the loan by making the required payments every month. Since consolidating debt typically involves paying off your existing balances, the credit cards themselves remain open unless you specifically choose to close them. Therefore, if you decide to keep some cards open, you’ll still have to make payments on them as usual.

Before restructuring your existing debt, pay close attention to the total cost of your current debt and a consolidation loan, including fees and hidden costs, so as not to end up paying more in interest over the life of the loan. You can use a debt consolidation calculator to see how much you could save by moving existing high-interest debt to a debt consolidation loan.

Consolidating debts can streamline your payments, but make sure your spending habits are in check, you’re regularly making all your monthly payments, and your credit score is in good shape.