family consolidating debt

Is Debt Consolidation Right for You?

Sometimes life can get expensive. Whether you’re paying for holiday festivities or emergency car repairs, it’s convenient to cover expenses with a credit card or other financing. But depending too heavily on these financial tools can spell trouble for your finances.

If you have large credit card or loan balances that are quickly accruing interest, debt consolidation could be a great way to save money, reduce stress, and get out of debt faster.

How Debt Consolidation Works

If you’re paying back multiple high-interest debts – such as credit cards, personal loans, or personal lines of credit – consolidation is a process that rolls them all up into a single loan with a single payment and lower APR (annual percentage rate). This can help you to:

  • Save money and pay off debt faster. By swapping out multiple high-interest rates for one lower rate, you’ll pay less interest over time and keep the debt from growing as quickly.
  • Simplify your finances. By consolidating, you’ll save yourself the headache of managing multiple bills, payment amounts, and due dates each month.
  • Help protect your credit score. Missing payments or using too much of your available credit harms your credit score. Consolidation can help you keep debt under control so your credit report and score can stay in great shape.

Make Sure Consolidation is Right for Your Situation

To benefit from debt consolidation, you’ll need a solid credit score and must be able to afford your new monthly payment.

If you have an unmanageable amount of debt or poor credit, consolidation probably won’t be an option. In that case, consider turning to a trusted credit counseling resource or other debt relief services  to help you get back on track.

On the other hand, if you have only a small amount of debt – say, an amount you could pay off in several months – you’re not likely to save much money with debt consolidation.

Credit Card Balance Transfers

Balance transfers are a type of debt consolidation that lets you shift unpaid balances from one credit card to another. This can be a helpful way to save money and it could also help you take advantage of a card with fewer fees or better features.

With average credit card rates around 17% – and often much higher – it’s no surprise that balance transfers are popular. In fact, some financial institutions promote their cards by offering limited-time low introductory rates on transferred balances, which can help cardholders save money by paying off their balance before the promotional rate ends.

Before doing a credit card balance transfer, make sure the card offers a low standard rate (not just a low intro rate). Also, look for a card with no balance-transfer fees; some cards charge fees as high as 5% of your transferred balances.

Consolidation Loans

If you have unpaid credit card and/or loan debt, a low-rate consolidation loan could help you pay much less interest over time. A fixed-rate unsecured loan offers predictable monthly payments and a set term that shows you exactly how long it will take to become debt free.

If you’re looking for an even lower interest rate, consider a secured loan like a savings-secured personal loan or home equity line of credit.1 Because they’re backed by collateral, these options typically come with lower rates. Bear in mind that the assets serving as collateral (whether your savings or your home) are tied up until the debt is paid off, and lenders are entitled to this collateral if you fail to pay back the loan.

Know Your Options

When considering consolidation loans or balance-transfer cards, compare your options with a Loan Consolidation Calculator to see how much you will pay in interest, what your monthly payment will be, and how long it will take you to pay off your combined debt.

Not all loans can be paid off with regular debt consolidation. For example, secured debt like auto loans aren’t eligible for an unsecured consolidation loan. Also, the balances you consolidate can’t exceed your new loan amount or credit card limit.

Important Tips

Consolidation doesn’t magically erase debt. It will take discipline and some new financial habits to ensure this debt is paid off for good. Here’s how you can start:

  • If you completed a credit card balance transfer, be sure to pay far more than your minimum payment each month.
  • Avoid taking on new credit card debt while paying off your current balance. For purchases, stick to cash or your debit card for now.
  • Stay on top of your bills by setting up automatic payments from your checking account.
  • Follow a monthly budget to keep your spending and borrowing under control now and in the future.

We Can Help

As a member-owned financial institution, USE Credit Union can make consolidating debt easier and more affordable. Our Platinum Credit card offers competitive low rates, a great rewards program, and NO balance-transfer fees, making it a smart option for balance transfers. And, our low-rate Signature Loan offers the simplicity of a low fixed rate and predictable monthly payments.2

Not sure what’s right for your situation? Reach out to our team.

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Disclosures

1. Equal Housing Opportunity

2. All loans subject to credit approval. Rates, terms and conditions subject to change.