As someone with a serious shopping habit, I’ve had my fair share of debt. Over the years, I’ve used several debt consolidation methods. Some worked great and some perpetuated the problem I was already having. I wanted to share my experiences with you to save you some of the learning curve I’ve had to have.
Consolidation is when you take out a loan or line of credit to pay off other debt, usually credit cards. Usually, consolidation is done at a lower interest rate than many high-interest rate cards, so you pay less overall. It also allows you to have only one monthly payment instead of paying each card separately. This could possibly save you hundreds of dollars a month!
Your Financial Habits
There are lots of options of companies to help you consolidate your debt. Before you consider consolidation, you need to think about your spending habits.
- Do you often go shopping for non-necessities?
- Have you tried to cut your expenses? Canceled cable, reduced your cell phone data? (See my top 5 tips for saving over $100 on your monthly budget!)
- Did you create a budget to track your spending and understand where your money is going?
Usually, your local credit union will have good interest rates on loans. These loans typically come with strict credit requirements, like a high credit score and low debt-to-income ratio. For those of us who need debt consolidation loans, generally it’s because we have a low credit score or high debt! This can make a regular loan difficult to come by.
There are other non-conventional options for those who of us don’t qualify for regular debt consolidation loans.
There are a lot of companies out there that promise to help with your credit score or help you pay down debt fast. Most of these ARE NOT legitimate! They promise to erase your debt at a cost of pennies on the dollar to you. Here are some important tips for choosing a debt consolidation company:
- Make sure to only work with a company that will review your financial situation.
- Some companies promise to use government money to pay off your debt. Don’t believe them! There’s no government program that pays off consumer debt.
- One big identifier of a scam company is if they ask you for a fee before they even negotiate with your creditor. There are new laws that prevent this so any company asking for upfront payment is a big red flag!
What debt management options are there?
There are a few different options for debt consolidation. You should carefully consider your individual situation and the long-term impact. Each one uses a slightly different technique.
- Debt Management – This is when a company takes over paying the creditors directly, and you make one monthly payment directly to the company. The debt consolidation company helps work directly with your creditors to potentially reduce payments, interest rates, or over-the-limit fee waivers. These can help you pay slowly over time and still fulfill your obligation to the credit companies. While enrolling in a debt management plan doesn’t directly impact your credit score, the act of closing accounts can have a negative impact. It reduces your available credit and shortens your credit history. Additionally, any accounts that are being paid through a debt management plan will have a notation on it, preventing you from obtaining any new credit.
- Debt Settlement – These companies are an option for people who can’t pay their full debt and are facing bankruptcy. The debt consolidation company works directly with your creditors to settle for less than you owe. Since you aren’t paying the total that you owe, this can negatively impact your credit score.
- Debt Consolidation Loan – This is when you get a loan out for the express purpose of paying off other debt. This method is more self-service than the other two, but is less likely to negatively impact your credit score. This is the method I’ve used a few times.
Who I Recommend for Debt Consolidation
I’ve had to do debt consolidation a few times in my life. I recently went through a divorce and came out with a lot of debt, so I’ve recently had to consolidate again. I’ve used all of the companies listed below and can personally confirm that they are all legitimate and above-board.
Disclaimer: I am not a financial professional. You should carefully review any terms, interest rates, prepayment penalties, etc. to make sure that the program is right for you and your situation.
- Payoff – This company is one of the newer debt consolidation companies. They make it extremely easy to apply and to use. When I was looking to consolidate a while back, they had the best rate available for the best monthly payment. They have better rates than credit cards, and allow you to have one, simple monthly payment. Checking your rate doesn’t affect your credit score and takes just a few minutes!
- Tally – Tally works a little differently. It’s entirely app based. It automates the process of paying your credit cards, and works with a line of credit to pay down as much as possible at a lower interest rate than your cards. The system knows all your interest rates and will pay down your cards in the most fiscally-responsible way. They maximise the money you’re paying by using the line of credit to pay down the highest interest rate first. They will also then pay above the available credit to pay all your minimum monthly payments. Tally gives a recommended monthly payment to make each month based on your spending to help pay down your debt faster, but the minimum required payment is manageable. I was skeptical at first, but I really love the ease of letting the app make all my payments for me and all I have to do is pay the one bill to Tally each month.
- Upstart – Similar to Payoff, Upstart is a consolidation loan you can use to pay down higher-interest debt. It’s peer-funded and takes more than your credit score into consideration, so it could be a good option if your credit is less than stellar. Upstart is a good option if you have less than stellar credit, but decent education and experience!
Is it right for you?
I’m hoping by sharing my financial struggles and experience that I can help you see through the mist of your own difficulty. There are lots of programs out there to help with consolidating your debt to make it more manageable. Even if you aren’t struggling, consolidation is a good option to get down to one monthly payment.
Have you ever tried a debt consolidation program? What would you do with an extra few hundred dollars a month?