How to get rid of your current debt?

Tuesday, May 23rd, 2023
Updated: May 23rd, 2023
The content is accurate at the time of publication and is subject to change.

Effective ways to consolidate your debt.

Trying to pay off debts is tough, especially if you have several debts with steep interest rates. Debt consolidation is something you might want to think about in order to streamline your debt and cut down on your monthly payments. Debt refinancing is the process of taking out a new loan at a lower interest rate and using it to pay off existing debt.

There are several types of debt you can consolidate: credit cards, personal and student loans, auto loans, medical bills, and more. It is easier to keep up with monthly payments when you combine different types of debt into one payment, and it can save you thousands of dollars in interest.

To consolidate any debt, it’s important to find a product that has a lower interest rate than the one you are currently paying. You can check out the options below and choose the one that works best for your financial situation.

1. Apply for a balance transfer credit card

If you have good to excellent credit (close to 700 or higher), you may consider qualifying for a balance transfer credit card that charges no interest during a promotional period, which can be of up to 21 months.

Preferably, if the credit card has no annual fee and no balance transfer fee. However, cards with no balance transfer fee are more likely to be an exception. More often than not, balance transfers involve paying a transfer fee, which usually ranges from 3% to 5%. Before you choose this option, think about whether the interest you save over time will offset the cost of the fee.

Perhaps the most important thing to remember is to settle the debt in full before the introductory interest-free period ends. After that period, any remaining balance will incur the credit card regular APR (Annual Percentage Rate).

Don’t forget to follow good financial habits and use your card responsibly. Otherwise, you might end up paying more money in interest if you miss payments or make them late.

Balance transfer credit cards are generally used to consolidate existing credit card debts, as not all banks allow debt refinancing from other types of accounts. Some credit card issuers do not allow you to transfer your balance from a personal or student loan to a credit card, for example.

2. Use a debt consolidation loan

Another way to combine multiple high-interest accounts into one lower payment is debt consolidation loans. The purpose of debt consolidation loans is to repay multiple, smaller debts by providing you with a lower payment, a lower interest rate, or both.

This type of personal loans can be used to tackle various types of debt, including credit cards, medical bills, student loans and more.

The interest rates, terms, and loan amounts, offered by different lenders may vary, so it’s important to shop around to find the best deal. Potential borrowers can get a pre-approval with a soft credit pull that won’t hurt their credit score. Furthermore, most loans are funded within one-two business days after they are approved.

3. Take a Home equity line of credit

A home equity line of credit (HELOC) is a revolving line of credit borrowed against the available equity of your home.

To be eligible for a HELOC, lenders typically require a credit score of at least 620, a debt-to-income ratio below 40%, and an equity of at least 15%. The maximum amount you can borrow on a home equity line of credit is around 85% of the value of your property, minus any outstanding debt on the mortgage, but some might allow you to borrow more or less. You typically have 10 years to withdraw cash from a home equity line of credit, while paying back only interest, and then 20 more years to pay back your principal plus interest.

Most HELOCs have adjustable interest rates, which means that your rate will likely change over the life of the credit line based on market conditions.

4. Debt management plan

A Debt Management Plan is a debt relief solution offered by credit counseling agencies that is used to pay back multiple debts through an ongoing single monthly payment.

Credit counseling programs start by looking at your financial situation. You go over your total income and expenses with your personal credit counselor after you select a counseling program provider. Depending on your budget and debt consolidation options, a counselor might create a debt management plan. This will allow you to pay off your debt between three and five years.

You should note that most credit counseling services charge fees. Even though your initial consultation and financial review are free with most providers, you’ll be required to pay two types of fees – enrollment (one-time) and monthly fees.

Since there are different debt consolidation options, it’s hard to talk about a one-size-fits-all solution. You need to weigh each program on its own merits and see if it’s best suited for your situation.

All rates and fees, and other terms and conditions of the products mentioned in this article/post are actual as of the last update date but are subject to change. See the current products' Terms & Conditions on the issuing banks' websites.

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