Learn how to consolidate credit card debt, student loans and tax debt – each in a simplified debt repayment plan.
Debt consolidation is a debt solution that allows you to combine multiple debts of a similar type into one monthly payment. This simplifies debt repayment so you only need to worry about one bill. It can also provide other benefits, such as lower interest charges and monthly payments. But how does it work?
How to consolidate debt, in general
You use debt consolidation when you have multiple debts of a similar type to repay.
Then you find a solution that combines them into one repayment plan.
At the same time, you may reduce or eliminate interest charges applied to the debt, although this doesn’t occur in all cases.
Consolidation can also stop future penalties, if you’ve fallen behind on any debt payments.
This allows you to get out of debt faster, with less hassle.
Get professional help to consolidate credit card debt, so you can rest easy knowing you found the right solution for your needs.
For the most part, you can only consolidate debt unsecured debts of a similar type. Secured debt refers to any loan that has collateral. So, you typically don’t consolidate mortgages or auto loans.
You can consolidate the following:
Each type of debt must generally be consolidated separately. So, for instance, you usually can’t combine student loans and credit cards together. There are different ways to consolidate each type of debt:
Type of Debt
Options for Consolidation
Credit card debt
1. Balance transfer2. Consolidation loan
3. Assisted consolidation program
Student loan debt
1. Federal Direct Consolidation Loan + federal repayment plan2. Private consolidation loan
1. Installment agreement
How to consolidate credit card debt
With credit card debt, the goal of consolidation is always to reduce or eliminate interest charges applied to the debt. Credit cards have relatively high interest rates, which makes it difficult to pay off balances quickly. Consolidations rolls all those balances into one repayment plan at the lowest interest rate possible.
There are three ways to consolidate credit card debt:
Credit card balance transfer
Personal debt consolidation loan
Debt consolidation program
How to consolidate debt with a balance transfer
This option only works if you have a limited about of debt and a good credit score.
You apply for a balance transfer credit card that offers a 0% APR promotion.
You get approved based on your credit; a higher score means a longer 0% APR promo period.
Once you open the account, you transfer your existing balances for a fee; this generally ranges from $3 per transfer to 3% of each balance transferred.
This pays off your existing credit card balances.
At 0% APR, you can pay off the consolidated debt interest-free
The goal is to pay off the full balance before the 0% APR promotion period ends.
How to consolidate credit card debt if you have bad credit
This option is the only solution you can use to consolidate debt if you have a bad credit score. It’s also referred to as a debt management plan or debt management program.
You apply for the program through a consumer credit counseling agency.
They review your debts, credit and budget to see if a debt management plan is the right choice for consolidation in your situation.
They work with you to find a monthly payment you can afford.
Then, they negotiate with your creditors to:
Get them to accept the adjusted payment schedule
Negotiate to reduce or eliminate interest charges
Once your creditors agree, your plan starts. You pay the agency one payment each month; they distribute the funds amongst your creditor as agreed.
It’s important to note that this solution doesn’t transfer your debt to the credit counseling agency. You still owe your original creditors. This is basically a professionally assisted repayment plan that makes it faster and easier to get out of debt.
Student debt is a little unique when it comes to consolidation. Interest rate reduction is not always the primary goal. That’s because federal student loan interest rates work differently than rates on other types of debt. As a result, you can’t always consolidate to cut interest rates.
Instead, you generally consolidate student loans to achieve one of two things:
Faster loan repayment
Lower monthly payments
That being said, there is a way to lower APR on student loans. However, it often involves converting federal student loan debt to private.
How to consolidate with a Federal Direct consolidation loan
You can only use this solution to consolidate federal student loans; this does not include PLUS loans to parents or private student loan debt.
First, you apply for a Federal Direct consolidation loans.
To be eligible, you must have at least one Federal Direct loan.
If so, you can consolidate most types of federal student loans with it, minus PLUS loans to parents.
The rate on the new loan is a weighted average of the rates on your existing loans.
The term is always set to 10 years, so your payments depend on how much you owe.
If the payment is too high, then you can move the consolidated debt into a hardship-based federal repayment plan.
This extends the term of the loan to 20-30 years, which lowers your monthly payment.
The monthly payment amount is based on your Adjusted Gross Income (AGI) and family size.
You must recertify your income and family size each year to maintain enrollment.
How to consolidate student loan debt with a private consolidation loan
This option is what you use if you want to lower the interest rates applied to your student debt. It can work for both federal and private student loans. However, it converts any federal student loan debt to private, which makes you ineligible for programs, like student loan forgiveness.
You apply for a student debt consolidation loan through a private lender.
The rate will be at least partially based on your credit score (rates on student loans tend to be lower than for other types of debt).
Once approved, you use the funds you receive to pay off your other loans.
This leaves only the lower-interest consolidation loan to repay.
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