When interest rates are low, it can feel like money is free. Everyone is offering loans, we’re getting credit card applications everyday in the mail, and every store we go into wants to sign us up for in-house credit.
With all that money flowing, our own personal debt can get out of hand.
In fact, according to one news outlet, personal debt in just the US in 2021 was over $15 trillion dollars. That’s a lot.
So it makes sense for people to want to get their debt under control. One popular option has been debt consolidation. But what is that, exactly?
Debt Consolidation in a Nutshell
The basic principle of debt consolidation is that you have multiple credit cards with high interest rates and you want to get out from underneath the debt. Debt consolidation is when you take out a new loan and use the funds to pay off your other debts.
What you can do is apply for either a 0.0% balance transfer credit card or a personal loan. We’ll break down each option, next. But keep in mind that debt consolidation won’t make sense for everyone, and it works best if you’re credit is above 690.
Zero Percent Balance Transfer
This option is best for people with great credit. You apply for a new credit card that has a 0.0% interest rate on balance transfers, as long as you pay the amount down in the specified time. The problem is, the longest 0.0% interest time frame I’ve seen is 18 months. And this is only an option for people with a credit score of 700 or higher.
Let’s be honest: if you have credit over 700 and can pay off that much of a balance transfer in 18 months, you might not need the debt consolidation in the first place.
The personal loan route is the one most commonly used for people to get out from underneath their credit card debt. What you do is take a personal loan for an amount greater than your credit card debt.
Once the cash hits your account, you pay off your credit cards with the money. Then, you focus your funds every month on paying off the personal loan amount.
The two upsides of this option are that there’s an end date–if you take out a five year loan, then your debt is over in five years. And the interest rate on personal loans is usually quite a bit lower than credit cards.
The downside to this option is that your payments will probably be much higher. Even with the lower interest rate, remember, you’ll be paying a monthly amount that will pay back the total amount owed.
Here’s a quick example. If you have two credit cards with interest rates around 20%, and a balance of $10,000 total, you may only be paying your minimum payments, perhaps only $30 a month each. But if you were to take out a personal loan for that $10,000, your monthly payment may be $200 or more.
But at the end of that personal loan term, you’re debt free. If you keep making your minimum payments, you might never pay the cards off.
Whether you take a debt consolidation loan is entirely dependent on your personal financial situation. But we found a free calculator online that can help you do the math. If you can find a personal loan at an interest rate you can afford for enough to pay your credit cards off, it may be worth your while.