From student loans to a house mortgage, debt accumulation is stressful and overwhelming. As you make moves to get out of debt, you might want to consider consolidating credit cards or other loans to save you time and money. But that begs the question—does debt consolidation help or hurt your credit?
The answer depends on how you consolidate and what you do with your debt afterward.
1. Debt Consolidation Loans
Getting a new loan to pay off other debts is the most popular way to consolidate. It’s certainly what most people think of when they consider consolidation. But finding a loan that has decent terms and is designed specifically for the purpose of consolidation can be challenging—especially if your credit scores are a bit lower due to the balances you’re carrying.
Tip: Triple check lenders’ certifications to make sure you’re dealing with a legitimate site if you’re shopping for a loan online. Scams abound.
Effect on Your Credit: Consolidating credit cards with high balances using an installment loan (i.e. a loan with fixed monthly payments) may actually benefit your credit rating, especially if you use the loan to pay off credit cards that are near their limits. At the same time, any new loan can cause a short-term dip in your credit scores—so don’t be too surprised if you see your credit score change slightly when taking out a new loan.
2. Debt Management Plans
Debt management plans are often confused with debt consolidation—however, they’re very different programs. Debt management plans (DMPs) are offered through credit counseling agencies and, much to many people’s surprise, they don’t actually consolidate your debt.
Instead, you make a “consolidated” payment to the counseling agency, which then pays each of your creditors—usually at a reduced interest rate. Even though you’re making only one or two monthly payments, the counseling agency doesn’t actually pay off your creditors for you—it simply acts as a middle man to help you repay your debts and ensure that the creditors get the money they’re owed. These programs are available regardless of credit scores, so if you are having trouble consolidating, a DMP might be worth considering.
Tip: If you choose to move forward with a DMP, you should close or suspend your credit card accounts. Unfortunately, you’re not permitted to use credit cards while enrolled in a DMP.
Effect on Your Credit: If you have a good credit score and adhered to a creditor’s repayment terms in the past, a DMP could have a negative impact on your credit as it indicates that you are experiencing or have experienced difficulty with payments. Also, since a DMP directly impacts payment terms, credit reporting agencies might ping your DMP commitment because it designates a change in payment policies.
3. The Credit Card Shuffle
Transferring a high-rate credit card balance to a card with a lower rate is another way to consolidate. Carrie Rocha, author of Pocket Your Dollars: 5 Attitude Changes That Will Help You Pay Down Debt, and her husband paid off some $60,000 in debt, and taking advantage of low-rate balance transfers was one of the strategies they used to dig out. However, if you decide to go this route, you must be very disciplined in your approach. Otherwise, you may fall into traps such as getting stuck with a balance at a high interest rate after the introductory period ends.
Tip: Read the fine print. Keep your eyes peeled for any “but” or “until.”
Effect on Your Credit: It depends on how you use a transfer. You’ll often see a temporary dip in your credit score when opening any new card. If you use a substantial portion of the available credit (on the card) to consolidate balances from other cards with lower balance-to-available-credit ratios, your credit scores may drop from that as well. Finally, you may also lose points if you open a new card and use a majority of the credit line to consolidate.
However, if a 0% card allows you to save money and pay off your debt faster, you can come out ahead in the long run, both financially and credit score–wise.
The End Goal:Less Debt Equals Stronger Credit
Paying down debt can have a tremendous impact on your credit scores. According to FICO, the company behind most of the credit scores used by lenders, consumers with high credit scores (e.g. 785 and above), tend to keep their balances low. Specifically, two-thirds of consumers with good credit carry less than $8,500 in non-mortgage debt, and they use an average of 7% of their available credit on their credit cards.
That means that paying off debt—whether you use a consolidation loan or just put every penny you can toward your debt—will often improve your credit ratings in the long run. The biggest risk, though, is that it’s easy to run up new balances on the cards you paid off in the consolidation—and that’s definitely not a good move for your credit or your bottom line. As you make progress on paying off your loans, periodically check your free credit report to see where you stand.
Remember, moving debt is a means to your end. The goal is to pay off those balances and free up cash flow as well as to help build strong credit. So whether it’s a consolidation loan, credit card shuffle, or DMP, know your options so you get there just a little faster.
If you’re one of millions of Americans trying to get rid of consumer debt, you’ll do almost anything to pay it off quickly: work long hours, take on a part-time job, sell your belongings in a yard sale.
When you’re feeling helpless about your debt, consolidating your loans might seem like the best option, especially if you have multiple types of loans weighing you down.
Why is debt consolidation so popular? Consolidation involves either taking multiple loans and converting them into one loan, or transferring one loan with one lender to another one, locking in more favorable terms along the way. Most of the time, people consolidate because they get a better interest rate they want to take advantage of. After all, a lower interest rate could help people pay off the debt faster and save money at the same time.
Other consumers like to consolidate if they have multiple loan payments that are proving difficult to juggle. Consolidating can simplify their finances and ensure that they’re not missing any payments.
However, consolidating your debt isn’t risk-free. Indeed, it’s a strategy with many potential repercussions, not the least of which are the impacts to your credit score and your financial future in general. Many people sign up for debt consolidation thinking it’ll change their lives, without realizing what they’ve actually agreed to.
Risks to consider before consolidation
You may pay more interest over time. One of the biggest risks when consolidating a loan is that you could end up paying more than you did before. If your consolidation loan has a longer loan term (that’s how much time the lender gives you to pay back the loan), you might pay more in interest overall than if you had kept your other loan(s) as is.
When some people consolidate their loans, they find that their monthly payments are now less than in the past. Some vow to keep paying the same amount anyway, to take advantage of lower interest rates and take bigger chunks out of the principal in the process. This is ideal. If you simply keep paying your new reduced monthly payment, it could take longer to pay off the loan and you could face higher interest charges in the long run.
Your credit might take a temporary hit. You might decide that paying down debt is worth the risk of a temporary ding to your credit, but it’s still a risk worth noting. If you are taking out a new credit card, a home equity loan or any other type of loan to consolidate debt, the lender will have to pull your credit report.
Every time you open a new form of credit, it has two impacts on your credit score. First, it counts as a hard inquiry and can erode your score. New credit inquiries will also stay on your credit report for a year, according to Experian, complicating attempts to take out another loan.
Secondly, a new debt on your report decreases the average age of your credit. The lower your credit age, the lower your overall score.
Which doesn’t mean you should avoid debt consolidation. It just means you should consider the pros and cons. Indeed, the benefits of debt consolidation can certainly outweigh this risk.
Debt relief fees. Some consolidation companies that promise to service your debt also end up charging high fees for something you can do yourself. Before consolidating, read reviews of banks and lenders to see which one will have the fewest fees and best rates you can get.
You may not solve the underlying issue. When you take out a new loan to repay other debts, you may not be fixing whatever foundational problem dragged you into debt in the first place. It’s one thing to face an unexpected medical emergency that resulted in bills you can’t afford to cover out of pocket. But if your debt is the result of overspending or a lack of budgeting, then you may only be treating the symptoms of a bigger condition. Because you are trading in one set of loans for another, you may still struggle to pay down the debt if you don’t change your spending habits.
Next up: We’re going to cover several ways to consolidate your debt and explain the pros and cons of each.
4 ways to consolidate your debt — and the risks involved
How they work. A balance transfer is when you take a credit card balance and move it to a different card, usually one that you have just opened. Most consumers use a balance transfer because they’re relatively easy to do and because they find a credit card offering a lower interest rate than the one they aim to replace.
Many credit card companies have special promotions in which you can get a 0 percent introductory APR on balance transfers for a certain length of time, sometimes as long as 24 months. Because credit card interest can be in the double digits, transferring a balance to a card with no interest lets borrowers pay off their total debt much faster.
For example, if you have a $5,000 balance on a credit card with 15% APR and you apply for a credit card with 0% intro APR for 24 months, you could transfer the balance and save $639.73 if you pay off the balance before the offer ends (making $250-a-month payments to accomplish that goal).
However, there might be a fee you have to pay with a balance transfer, often set at 3-5 percent of the total balance. Do the math before you apply for a balance transfer offer. The money you will save on interest charges might outweigh the cost of the balance transfer fee.
Risks. One of the risks of a balance transfer is that you might not actually pay off the balance before the balance transfer offer ends. This is dangerous because then you could end up paying high interest fees on top of the balance transfer fee you already paid to start the ball rolling.
Also, opening up a new credit card will usually ding your credit score and drag down the average age of your credit accounts (also a ding). If you’re applying for a mortgage or other significant loan, a new credit inquiry could hurt your chances of getting the best rate.
Credit card companies can be ruthless when it comes to 0 percent balance transfer offers. If you miss a payment or are late, your special offer could end, and you could be switched to the regular, substantially higher APR. If you go through with a balance transfer, set up autopay, or check every month to make sure your payment has gone through on or before the due date.
How they work. A personal loan can be applied in a number of ways, such as paying off medical bills, funding a wedding or consolidating debt. It’s a fixed amount of money borrowed for a fixed amount of time. If you have a high credit score and a solid income, you may be able to qualify for a loan with a decent rate, which can make this a more affordable borrowing tool than, say, a high-interest credit card. On the other hand, people with poor credit may still qualify for a personal loan, but are likely to have to contend with much higher interest rates.
Applying for a personal loan is easy. You can reach out to a local bank or credit union or apply online. MagnifyMoney’s parent company, LendingTree, has a great personal loan tool. Most lenders will give out personal loans up to $35,000 and will ask that they be repaid within three to five years. If you get approved for a personal loan, the bank will usually wire you the funds, and then you can use them for any purpose.
Risks.A personal loan is often set up as a short-term loan. While this might help people pay off their debt expeditiously, the pitfall of a compressed timeline is the difficulty of staying on track. There’s no point in getting a personal loan to consolidate your debt if you end up unable to repay your loans.
A HELOC is a line of credit you have access to for a certain period of time. You can withdraw money for a certain length of time and then enter a final repayment period, whereas a home equity loan means the bank gives you a lump sum that you then repay every month. The amount you can receive depends on how much the home is appraised for and how much you still owe.
Many people prefer to take out a home equity loan or HELOC for debt consolidation purposes because interest rates are usually far lower than they would be on a different kind of loan. Unlike a personal loan or credit card balance transfer offer, a HELOC is backed by a piece of property that the bank can resell if you stop making your payments. For that reason, lenders are willing to give you a better deal than if you take out a loan that’s not secured by such collateral.
Risks. A home equity loan and a HELOC are, as we noted, backed by the home as collateral. If you fail to repay the home equity loan or HELOC, then the lender can seize the residence. In such circumstances, not only does your credit history take a hit, you also may have lost your biggest financial asset.
If you lose your home due to foreclosure, your credit score will also likely tank, making it harder to purchase another house. These issues are all a huge reason why consumers should be careful about these particular options.
Student loan consolidation (private and federal)
How it works. If you have student loans through the federal government, you can either consolidate/refinance them through the Direct Consolidation Loan program or through a private lender. You won’t save any money on interest with the Direct Consolidation program, however, as the program determines your new interest rate by averaging the rates on your existing loans. But it can be helpful for borrowers juggling multiple student loan payments.
If you’re looking to save on interest, then you may choose to refinance your loans with a private lender instead. To get the best refi offers, you’ll have to have great credit and a solid income. Check out MagnifyMoney’s list of the best student loan refinance companies out there. Like other forms of consolidation, refinancing your student loans will streamline your payments and make it easier to stay on top of what you owe. If you’re apt to forget payments, then consolidating several loans into one, with one payment, might help you avoid racking up late-payment fees.
The risks. If you decide to consolidate your federal loans with a private lender, you will lose all the protections and benefits that come with federal loans, including deferment, forbearance and income-based repayment plans. Forgiveness options such as the Public Service Loan Forgiveness Program are also off the table if you consolidate your federal loans with private loans, even through federally guaranteed banks.
Income-based plans are useful if you work in a low-paying field or have an unstable job. Most private loan servicers don’t provide these types of options, which makes it even more important to keep your federal loans where they are.
Often, consolidating your student loans can mean that your monthly payment decreases as your payment term increases. Unless you’re actively paying more than the minimum every month, you’ll end up paying more in interest overall.
Alternatives to debt consolidation
If you’re having trouble managing your debt, refinancing your loans could be one solution. When you refinance, your hope is to secure a loan with more favorable terms, ideally a lower APR, but you may also refinance in order to get a loan with lower monthly payments.
The simplest way to take hold of your debt is to go over your expenses and compare them to your income. Are there any changes you can make to spend less money every month? Could you try to eat out less or take the bus to work? All those small substitutions will add up quickly and you can put the difference toward your loans.
If you want to pay off your debt quickly and are afraid of consolidating, consider using the debt snowball approach, popularized by Dave Ramsey. This strategy recommends paying off the smallest balance first. Then, when that loan is extinguished, you’ll apply the monthly payment to the next-smallest balance, and so on, until all your debts are repaid. The snowball method can help you feel empowered, and not overwhelmed, in tackling your loans.
If you’re truly having difficulty with your loans, you should consider talking to a bankruptcy attorney. That expert should be able to tell you if your situation is truly dire and if you should consider filing for Chapter 7 or 13.
The bottom line
Consolidating debt can make sense for the right person. If you’re already trying to pay off your debt quickly and want to minimize your interest fees, then consolidation could save you even more money and time.
Before you sign up, however, look at the total amount of interest you’ll pay with your current loan terms compared with the terms of consolidation. Will you save money? Or will you just trade in smaller payments in exchange for more breathing room?
If you see consolidating as one more way to extend your payments, then doing so won’t lead to debt payoff. Consider the pros and cons before you decide on debt consolidation — and be aware that it’s not a magic cure.
If you’re feeling buried by what you owe, debt consolidation could provide you with both immediate relief and a quicker path to debt-free.
Debt consolidation is the process of taking out a new loan and using that money to pay off your existing debt. It can help in a number of ways:
A lower interest rate could save you money and allow you to pay your debt off sooner
A longer repayment period could reduce your monthly payment
A single loan and single payment could be easier to manage than multiple loans
But debt consolidation isn’t without its potential pitfalls. First and foremost: Consolidating your debt doesn’t address the behavior that got you into trouble in the first place. If you’re in debt because of overspending, consolidating may actually exacerbate your problems by opening up new lines of credit that you can use to spend even more.
And every debt consolidation option has its own set of pros and cons that can make it a good fit or a bad one, depending on your circumstances.
This post explains all of those pros and cons. It should help you decide if debt consolidation is the right move for you, and, if so, which option is best.
With this kind of transfer, you open a new credit card and transfer the balance on your existing card(s) to it. There is occasionally a small fee for the transfer, but if you have excellent credit, you can often complete the transfer for free and take advantage of 0 percent interest offers for anywhere from 12-21 months. None of the other debt consolidation options can match that interest rate.
There are some downsides, though:
You need a credit score of 700 or above to qualify for the best interest rate promotional periods.
Many cards charge fees of 3 to 5 percent on the amount that you transfer, which can eat into your savings.
Unless you cancel your old cards, you’re opening up additional borrowing capacity that can lead to even more credit card debt. Let’s put that another way: Now that you’ve paid off your old cards, you might be tempted to start using them again. (Don’t!)
If you don’t pay the loan back completely during the promotional period, your interest rate can subsequently soar. Some balance transfer cards also charge deferred interest, which can further increase the cost if you don’t pay your debt off in time.
This just isn’t for people with high levels of debt. Credit limits are relatively low compared with those tied to other debt consolidation options.
Given all of that, a credit card balance transfer is best for someone with excellent credit, relatively small amounts of debt and strong budgeting habits that will prevent them from adding to their burden by getting even further into debt.
Home equity loans and home equity lines of credit (HELOCs) allow you to tap into the equity you’ve built in your home for any number of reasons, including to pay off some or all of your other debt.
The biggest benefit of this approach is that interest rates are still near all-time lows, giving you the opportunity to significantly reduce the cost of your debt. You may even be able to deduct your interest payments for tax purposes.
But again, there are perils. Here are some of the downsides to using a HELOC/home equity loan for debt consolidation:
Upfront processing fees. You need to watch out for upfront costs, which can eat into or even completely negate the impact of lowering your interest rate. You can run the numbers yourself here.
Long loan terms. You also need to be careful about extending your loan term. You might be able to reduce your monthly payment that way, but if you extend it too far, you could end up paying more interest overall. Home equity loans typically have terms of five to 15 years, while home equity lines of credit typically have 10-to-20-year repayment periods.
You could lose your home. Finally, you need to understand that these loans are secured by your home. Fail to make timely payments, and you put that home in jeopardy. This is why, though the interest rates are lower than with most other debt consolidation options, there’s also added risk.
Home equity loans and HELOCs are generally best for people who have built up significant equity in their home, can get a loan with minimal upfront costs, and either don’t have excellent credit or need to consolidate more debt than is possible with a simple balance transfer.
You can ask your current mortgage provider about taking out a home equity loan or line of credit. Also, compare offers at MagnifyMoney’s parent company, LendingTree, here and here.
3. Personal loans
Personal loans are unsecured loans, typically with terms of two to seven years. Interest rates typically range from 5 to 36 percent, depending on your credit score and the amount you borrow.
The advantage of a personal loan over a credit card balance transfer is that it’s easier to qualify. While you typically need a credit score of 700 for a balance transfer, you can get a personal loan with a credit score as low as 580. You can also qualify for larger loan amounts than the typical balance transfer.
And the big advantage over a home equity loan or line of credit is that the loan is not secured by your house. This means you can’t lose your home if you have trouble paying back the debt. You can also apply for and obtain a personal loan very quickly, often at a lower cost than a home equity loan or line of credit.
The biggest disadvantage is that your interest rate will likely be higher than either of those options. And if your credit score is low, you may not find a better interest rate than what you already have.
Generally, a personal loan is best for someone with a credit score between 600 and 700 who either doesn’t have home equity or doesn’t want to borrow against his or her home.
You can shop around for a personal loan at LendingTree here. It’s important to compare offers to get the best deal possible.
4. Banks and credit unions
In addition to shopping for a personal loan online, you can contact your local banks or credit unions to see what types of loan options offer.
This is more time-consuming than applying online, and it can be harder to compare a variety of loan options. But it may lead to a better interest rate, especially if you already have a good relationship with a local bank.
One strategy you might try: Get quotes online using a service like LendingTree’s, then take those quotes to the bank or credit union and give it a chance to do better.
This strategy is best for anyone who already has a good and lengthy banking relationship, particularly with a credit union. But if you’re going the personal-loan route, it’s worth looking into in any case.
If you’re lucky enough to have family members or friends who have ample assets and are happy to help, this could be the easiest and cheapest debt consolidation option.
With no credit check, no upfront fees and relatively lenient interest rate policies, this might seem like the best of all worlds.
Even so, there are some things to watch out for.
First: A loan fundamentally changes your relationship with the person from whom you borrow. No matter what terms you’re on now or how much you love and trust this person, borrowing money introduces the potential for the relationship to sour in a hurry.
Consequently, if you do want to go this route, you need to do it the right way.
Eric Rosenberg, the chief executive of Money Mola, an app that lets friends and family track loans and calculate interest, suggests creating a contract that outlines each party’s responsibilities, how much money will be borrowed, the timeline for repayment, the payment frequency and the interest rate. He also suggests using a spreadsheet to keep track of the payments made and the balance due.
If you have a family member or a friend who is both willing and able to lend you money, and if your credit isn’t strong enough to qualify favorably for one of the other options above, this could be a quick and inexpensive way to consolidate your debt.
And while you can’t borrow from an IRA, you can withdraw up to the amount you’ve contributed to a Roth IRA at any time without penalties or taxes, and you can withdraw money from a traditional IRA early if you’re willing to pay both taxes and a 10 percent penalty (with a few exceptions).
The biggest advantage of taking the money out of a retirement account is that there is no credit check. You can get the money quickly, no matter what your credit history looks like. And with a 401(k) or 403(b), you are also paying interest back to yourself rather than giving it to a lender.
One reason is simply this: Your current debt is already hindering your ability to save for the future, while taking money out of these accounts will only exacerbate the problem. Another is that tapping a retirement account now may increase the odds that it will happen again.
“I’d stay away from a 401(k) loan like the plague,” says Ryan McPherson. McPherson, based in Atlanta, Ga., is a certified financial planner and fee-only financial planner and the founder of Intelligent Worth. “With no underwriting process, and because you’re not securing it with your house, you’re more likely to do it again in the future.”
If you are in dire straits and cannot use any of the other strategies above, then borrowing or withdrawing from a retirement account may be the only consolidation option you have. Otherwise, you are likely to be better off going another route.
Things to consider before picking a debt consolidation strategy
With all these debt consolidation options at your disposal, how do you choose the right one for your situation? To be sure, it’s a key decision: The right option will make it easier for you to pay your obligations, and less likely that you’ll fall back into debt.
Here are the biggest variables you should consider before making the choice:
Have you fixed the cause of the debt? Until you’ve addressed the root cause of your debt, how can any consolidation option help you get and stay out of debt?
How much debt do you have? Smaller debts can be handled through any of these options. Larger debts might rule out balance transfers or borrowing from relatives or friends.
What are your interest rates? You need to be able to compare your current interest rates with the interest rates you’re offered by the options above, if you want to know whether you’re getting a good deal.
What is your credit score? Your score determines eligibility for various debt consolidation options, as well as the quality of the offers you’ll receive. You can check your credit score here.
When do you want to be debt-free? Shorter repayment periods will cost less but require a higher monthly payment. Longer repayment periods will cost more but with a lower monthly payment. With this in mind, you need to decide both what you want and what you can afford.
Do you have home equity? This determines whether a home equity loan or line of credit is an option. If it is, you should decide if you’re comfortable putting your home on the line.
Do you have savings? Could you use some of your savings, outside of retirement accounts, to pay off some or all of your debt? That may allow you to avoid debt consolidation altogether and save yourself some money.
So … what’s the best consolidation strategy?
Unfortunately, there is no single answer to this tough question. The right answer for you depends the specifics of the situation.
Your job is to know what you currently owe and understand the pros and cons of each option we’ve outlined above. In this fashion, you can make an informed choice, one that’ll get you out of debt now and keep you out of it forever.
In June, it increased to $1.02 trillion, according to a report from the Federal Reserve. In other words, Americans now have more credit card debt than just before the 2008 financial crisis.
When facing such massive amounts of debt, it may be tempting to consider consolidation, one of the most popular ways for consumers to cope with mountains of bills. But before making such a move, it’s important to think about the potential downsides and drawbacks—and there are quite a few.
“Debt consolidation is rarely a good option,” says Holly Morphew, a certified financial health counselor. “Those looking to consolidate debt usually don’t understand what it is and are simply stressed about unmanageable debt and looking for a way out of it.”
Among the nuances to understand is how consolidation impacts your credit score, what your new interest rate will be, and what the repayment terms are—particularly when consolidating student loan debt, which can be dangerous, says Morphew.
Here are six of the biggest drawbacks to keep in mind when considering debt consolidation.
1. Transfer Fees
Consolidating credit card debt via a balance transfer to a new card can seem enticing, especially when there are so many 0% APR offers being presented to you at every turn. But Han Chang, cofounder of InvestmentZen.com, warns that nothing is ever free.
“Offers like this usually come with a one-time balance transfer fee ranging from 3% to 10% of the total balance transfer,” says Chang. “That can really add up and, if you’re not careful, completely negate any savings that 0% APR offers.”
2. Government-Backed Program Losses
Another often-overlooked drawback of debt consolidation is the potential loss of government-backed programs, primarily pertaining to student loans. While there can definitely be some advantages to combining all of your student loans, be sure to read the fine print of your new agreement carefully.
In particular, determine whether you’ll still be eligible for common federal government perks.
Morphew says student debt consolidation is actually one of the most risky things to do.
“If you don’t choose the right company, or decide to consolidate federal subsidized loans into a private loan, you can lose those repayment benefits such as deferment, forbearance, and loan forgiveness,” she says.
3. Credit Score Dings
If you are working with a debt consolidation company or a financial institution to combine your bills, the company will likely conduct a hard credit inquiry. While the effects of this inquiry are temporary, says Chang, be prepared to see your credit score drop in the short term.
Often the goal of debt consolidation is to secure a lower overall interest rate. But that’s not always what happens, says Morphew. You can actually end up paying more because the company giving you the new consolidated loan will average the rates on your debt and round up based on its terms, she says.
In addition, if you have poor credit to begin with, you may not qualify for a lower interest rate, says Amber Westover of BestCompany.com.
“You may end up paying more for your debt over the course of your consolidation loan,” Westover says.
5. Expensive Debt Consolidation Costs
Debt consolidation companies don’t work for free. Many national companies offering this type of service charge a fee of 15% of the total debt, says Richard Symmes, a consumer bankruptcy attorney.
“This leads the consumer to pay much more than if they had negotiated with the creditor on their own. Many of these fees may even be fraudulent under individual state laws, which cap how much a company can charge for debt consolidation services,” he says. He instead suggests conducting such negotiations with the help of an attorney, who simply charges a flat fee.
6. Increased Overall Loan Costs
One last drawback worth noting: just because your monthly payments may go down under a debt consolidation program doesn’t necessarily mean your overall debt is going down.
“If you consolidate high-interest short-term debt for very long-term debt, then you may actually be paying more,” says financial analyst Jeff White. “For instance, paying $500 per month for one year (which translates into $6,000) is less than paying $75 per month for 10 years (which is $9,000).”
Consolidating could be a smart financial move, or it may just sound like it. To find out if consolidation or another debt management strategy is right for you, visit our Managing Debt Learning Center.
There’s a new credit card debt consolidator in town — but its name is likely familiar to you.
Investment banking giant Goldman Sachs announced on Thursday that it will begin offering unsecured personal loans to people looking to pay off high-interest credit card debts. The loans will be offered through a new online platform, Marcus: By Goldman Sachs, named after Marcus Goldman, one of the firm’s founders.
Borrowers can apply for fixed-rate, no-fee personal loans of up to $30,000 for periods of two to six years, the firm said in a press release. According to Marcus’ website, applicants will be offered annual percentage rates (APRs) ranging from 5.99% to 22.99%. Late payments, partial payments, missed payments or defaults on the loan can show up on your credit report.
The platform isn’t fully open to the public just yet: Initially, applications will require a code that millions of prospective customers will receive by mail. You can request one on Marcus’ website.
“The feedback we expect to hear from the initial group of customers will help us to refine the Marcus experience,” the firm said in the release. It plans to offer the personal loans to a broader audience in coming months.
Debt Consolidation 101
Goldman — or, maybe we should say, Marcus — isn’t the only one who wants to pay off your plastic. Consolidating high-interest credit card debt with a personal loan has long served as a way for people to potentially cut down the lifetime costs of their existing debts and provide themselves with a hard date for when they can be out of the red.
But there are risks involved with this strategy: For instance, undisciplined spenders could find themselves worse off if they take out a personal loan, pay their credit card balances down and run them right up again. And when converting your revolving credit card debt to an installment loan, you’re locking yourself into a fixed monthly payment you will have to make (otherwise, your credit score could take a hit), which could be problematic if you hit financial setbacks down the line.
Plus, generally, only good credit scores qualify for a lender’s best terms and conditions, so if your credit isn’t exactly stellar — a strong possibility for folks carrying large amounts of debt — you may not be an offered an APR lower than the one you’re already paying. In any event, it’s a good idea to shop around and read the fine print of any offer you receive to be sure it’s right for you. You can learn more about the pros and cons of debt consolidation loans here.
If you decide to shop around, it can help to brush up your credit score ahead of time. (You can view two of your scores, updated every 14 days, for free on Credit.com.) If your score is currently looking shoddy, you can potentially fix it by paying down high credit card balances (we get it, that’s sometimes easier said than done), disputing errors on your credit reports and limiting new credit inquiries while your score rebounds.
Do you have too many credit cards? Perhaps you are having trouble managing all of your open accounts, or are unable to pay the annual fees for all the cards that you have. If you’ve decided that you don’t need some of your credit card accounts, then you should carefully consider which are the best ones to close.
Here are a few factors to consider.
1. Which Cards Have the Highest Annual Fees?
If annual fees are one of the reasons that you’ve decided to close some credit card accounts, then it only makes sense to start with the ones that have the highest. But instead of just closing the most expensive cards, consider how much value the card offers to you compared to its annual fee. For example, an airline frequent flyer card with a $95 annual fee might offer you benefits such as free checked bags that are worth much more to you than another card with a $49 annual fee that has very little additional value. In that case, you might be better off canceling the card with the $49 fee and paying the $95 fee.
2. Which Cards Do You Use the Least?
Another thing to consider is the rarely used cards, but keep in mind all of the ways you might use the card, not just how often you make charges. Some cards might offer valuable benefits, like car rental insurance or roadside assistance, that you use on occasion, even though you rarely make charges.
3. Which Cards Have Rewards That Are Forfeited When the Account is Closed?
With some credit cards, your rewards can only be redeemed if your account is open and in good standing, so the last thing you would want to do is to close one of those cards before redeeming your points. However, if you gain points and miles through loyalty programs offered by airlines, hotels or other partners, you can usually keep them.
4. Which Cards Offer the Best Customer Service?
Beyond the terms and conditions of a credit card, many customers value the relationship and customer service they have with their card issuers. If you’ve had trouble with your card issuer’s customer service, then you might not wish to keep the account. But likewise, if you’ve been impressed with your interactions with the card issuer, you may reconsider before deciding to close an account.
Alternatives to Closing an Account
Before you close a credit card account or consolidate your debt, there are some alternatives to keep in mind. First, if the card has no annual fee, you might wish to keep your account open and just place the card in a proverbial, or actual sock drawer. Doing so could help keep your debt-to-credit utilization ratio lower. This ratio is the total amount of credit you have been extended, divided by the sum of all of your balances. For best credit scoring results, experts generally recommend keeping the amount of debt you owe below at least 30% and ideally 10% of your total available credit limits. So, if you’re carrying high balances on your other credit cards, closing one with a high credit limit could wind up hurting your credit. (You can see where you currently stand in this category by viewing two of your credit scores, updated each month, for free on Credit.com.)
You can also give the card issuer an opportunity to retain your business before closing your card. For example, many card issuers will offer to waive the annual fee or to give you a one-time credit for additional rewards in order to keep you as a customer. Finally, many card issuers will offer you a no-fee version of a card before closing your account. A no-fee version will have fewer rewards and benefits than the similar card with with an annual fee, but it may be a better alternative for some cardholders.
Having a credit card account is not a lifelong commitment and it’s inevitable that customers will close their accounts one day. But take some time to consider all of these factors to help make the right decision.
About a few months ago, my condo building had a leak that damaged several units including mine. The total damage came out to be over $11,000. Although I had homeowners insurance, the process to file a claim would’ve taken over two months. If you’ve ever experienced anything like this, I’m sure you understand the dire need to get contractors out to fix the damage ASAP.
This is when I looked into getting a personal loan to cover these expenses until the insurance company finalized the claim. I started my research on LendingTree and Credit Karma by looking at customer reviews, and started to apply for personal loans through their sites.
The good thing about these two sites is that you can check your rates without impacting your credit score. They’ll automatically find the best interest rate and terms for you by matching you with several lenders, but I soon realized one thing that most people overlook: getting the lowest interest rate is not necessarily the best option for you.
My Initial Findings: Origination Fees
I was pre-approved by most lenders, including: Prosper, LendingClub, and Upstart. Each offered a fair interest rate and monthly payment that I could afford. As I started to complete the application for LendingClub, it wasn’t until the very last page that caught my eyes.
The exact loan amount for $11,000 that I requested wasn’t the amount I’d be receiving. Their origination fee of 6% is taken right out of the loan. So let’s do some simple math:
$11,000 x 6% = $660. My final loan amount: is $11,000-$660 = $10,340.
See the dilemma here? In order to get the full $11,000 that I needed for the home repair, I’ll have to take approximately $12,000. To make matters worse, I’ll have to pay interest on the $12,000 that I “borrow”, not the actual amount that I receive.
But here’s the Bigger Issue…
Since the insurance company is expecting to finish the claim in a few months, what happens if I want to payoff the loan? Although almost every single lender out there claims that they don’t charge a prepayment penalty, aren’t these origination fees basically the same thing?
According to the Examiner, “Experts argue that high loan origination fees act as prepayment penalties in disguise”.
If you’re taking out a loan and expect to pay it back earlier, you might be better off taking out a higher interest rate loan. The origination fees may seem small at first, but you’ll end up paying more if you decide to pay it back faster.
If you’re thinking that you’ll need the entire length of the loan to pay it off, getting a lower interest rate loan will be more beneficial for you.
Origination fees can seem like a small fee especially if you’re in dire need of cash, but in reality, these fees can end up costing you a lot more in the short term. Always figure out a game plan to see when you can pay off your loan. This will help you make the best decision to make sure you’re getting the best deal.
Anyone who has ever had credit card debt knows these two things: It’s expensive, and it can take forever to pay off.
You can save a lot of time and money by increasing the amount of money you pay toward the debt every month — using a credit card payoff calculator like this one helps you figure that out — but that’s not the only way to reduce the cost of getting out of credit card debt. You could also use a personal loan to consolidate your balances.
Personal loans often have lower interest rates than credit cards. Credit cards also tend to have variable interest rates, which can make paying off the balances a little less predictable than personal loans, which generally have a fixed rate. On top of that, people sometimes struggle to pay off debt while continuing to use their credit cards. Because personal loans are installment loans — you can’t add transactions to them like you can a credit card — it can be easier to work toward that end goal of getting out of debt.
Personal loans can also be extremely helpful for people whose credit card debt involves multiple cards. By paying off all your credit card debt with the personal loan, you make the debt easier to manage with a single payment and a single interest rate.
Keep in mind you have to apply for a personal loan, which will result in a hard inquiry on your credit report and a slight ding in your credit scores, and the better your credit score is, the better your interest rate on your personal loan will likely be. Interest rates and loan approval also depends on how much much you’re asking to borrow and your ability to repay the loan (like your income or other debt obligations you have).
Before you apply for a loan to consolidate your credit card debt, get an idea of where your credit stands: You can get a free credit report summary, updated every 30 days, on Credit.com. That summary will show you an aspect of your credit scores called “account mix” and if you happen to have no open installment loans, a debt consolidation loan could actually help you in that area.
Personal loans aren’t the only strategy for paying off credit card debt. You might also want to consider a balance transfer (here’s an expert guide to picking a balance transfer credit card), which can give you some breathing room from your debt during a promotional period of 0% interest. Again, you’ll want to check your credit and consider the balance transfer fees involved before applying.