Consolidating Your Debt

What does it mean to consolidate your debt? Consolidating debt is a fancy way of saying you take all of your debt in its different forms and put it into one place. The real question is, why would someone want to do that in the first place? Debt can cause people a lot of stress, and when you are going around paying off debt to different credit card companies every month, the task of digging yourself out of that hole can feel overwhelming. This is where consolidating your best comes into play.

An Anecdote

Credit cards are one of the most tempting “superpowers” you get when you become a legal adult. Having access to money that you may not otherwise have is intoxicating, especially for those of us with little to no self-control. Gotta follow the dopamine. But this “superpower” isn’t limitless. In the famous words of Uncle Ben, “With great power comes great responsibility.” And as a fresh adult new to the world of adulting, there is no greater responsibility than not messing up your credit. It determines almost every other aspect of adulting. Want a place to live? Buy a car? Get lower interest loans? The list goes on, but building and maintaining s good credit score as soon as you can is one of if not the most important things you can do financially in your early twenties.   

Consolidating Your Debt

2 Main Ways to Consolidate Your Debt

There are two main ways to consolidate your debt which will form your debt into one monthly payment.

  • 0% Interest Balance-Transfer Credit Card: Yes, I’m telling you to get another credit card to help pay off your existing credit cards. But this is a special type of credit card designed for the sole purpose of helping consolidate their debt. So transfer all of your debt to this card and pay off the balance during the 0% promotional period, or at the very least, pay off as much as you can. (You will need a credit score of 690 or higher to qualify for this card.)
  • Fixed-Rate Debt Consolidation Loan: This is a fancy loan that will give you the money necessary to pay off your debt, putting all of your debt into one place where you will pay it off in monthly installments. Unlike the 0% Interest Balance-Transfer Credit Card, people with bad or low credit scores are qualified; however, the worse your credit score, the higher your interest rate will most likely be. 

Talking about credit cards, learn more on how to improve your credit score.

Is Consolidating Your Debt a Smart Move?

The success of consolidating your debt depends on a few things.

  • The monthly cost of your debt payments does not exceed 50% of your gross monthly income. This number should include your rent or mortgage payment. 
  • Your credit score qualifies you for a 0% credit card or a low-interest debt consolidation loan. The whole point of consolidating your debt is to make paying it off a little easier, which won’t happen if your loan has high interest. 
  • You can consistently pay off/cover the payments towards your loan.
  • If you go with the consolidation loan, you need to pay it off in 5 years.

Use a Debt Consolidation Calculator to help sort out the numbers.

Things to Think About

Debt can be crippling. And when you have enough of it, it can be all that you think about every day. So how do I get myself out of this position? When it comes to the world of adulting, there isn’t anything more freeing than being out of debt and financially stable. However, consolidating your debt isn’t the magic fix to all of your problems. It doesn’t address how you got into that debt, whether it’s excessive spending habits or lack of self-control. But if you are feeling overwhelmed by your debt and can pay it off with reduced payments, then this might be the solution for you. 

If your debt is small enough that you can pay it off on your own within a year at the current pace that you’re paying it off, then don’t bother consolidating. You wouldn’t save enough money to warrant consolidation. Try a DIY payment method instead. There are countless ways to help overcome debt with tips and tricks all over the place. Try looking into Debt Snowfall as a starting point. 

And if debt consolidation isn’t the move for you becomes your payments exceed that 50% income threshold, then it might be time to look into some debt relief options instead. 

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