Credit Consolidation: A Step-by-Step Guide

Credit consolidation can be a great way to help you get your finances under control, especially if you have multiple credit cards with balances on them. Credit consolidation, sometimes called debt management, involves taking out one loan to pay off all your credit card debt in one fell swoop. But it’s not as simple as calling up your bank and having them take care of it for you; there are things you need to consider before going through with credit consolidation, and even then, the process isn’t necessarily going to be easy.

Is it worth it?


There are several ways to consolidate your credit card debt, but it’s important to evaluate whether or not consolidation is right for you. As with any major financial decision, it’s best to learn as much as you can about all of your options before you make a decision. Use our guide as a jumping off point to get familiar with what consolidation is and if it might be right for you. You can then apply that knowledge in your search for a solution. There are so many different solutions out there that finding one that fits your personal situation is extremely important. Some even allow you to break up a big balance into smaller monthly payments over time, which helps ease some of the pressure associated with owing thousands of dollars at once!

Getting your score up before you apply


It’s true that your credit score is a huge factor in whether you get approved for credit cards, loans, and lines of credit. However, not all lenders use FICO scores to decide whether or not to give you a loan. Your lender may look at other factors like your income level, how long you’ve been with your current employer (and if you’ve stayed with that company) and how much debt you currently have on other lines of credit. The good news is that even though lenders don’t always use FICO scores, they do take into account things like your payment history and any late payments or delinquencies on your reports when deciding whether or not to give you a loan.

Think about an income tax refund


An income tax refund is essentially free money. So while you may have enough money in your budget to cover expenses, if you’re lucky enough to get an income tax refund, don’t put that money back into your spending account. Instead, set it aside so you can pay off debt or save for a big goal like retirement or paying for college. There are plenty of reasons to use a credit card instead of using cash, but just make sure not to run up any balances and end up paying interest on what should be free money!

Understand what debt consolidation means


Debt consolidation means taking multiple high-interest credit card loans and combining them into one loan with a lower interest rate. In general, you should use debt consolidation only if you can’t afford to pay off your debts in full every month or have more than $10,000 of unsecured debt. Typically, credit card companies charge a fee for debt consolidation that ranges from 1% to 5% of your total balance. If you want to do it on your own, look into refinancing student loans and getting a personal loan through a bank or peer-to-peer lending site like Lending Club or Prosper.

Choose the best way to consolidate


If you’re looking to consolidate your debt, there are a few ways to do it. One option is to use a credit card balance transfer. For example, if you have credit card debt at 20 percent interest and another balance at 5 percent interest, you could transfer your credit card balances onto one of 0% interest cards and pay off the debt faster than before. You can also consolidate by borrowing money from friends or family or taking out a loan. Whatever method you choose, it’s important to remember that while consolidation can be helpful in getting out of debt quickly, it isn’t free. Always read all terms and conditions carefully before signing up for any type of loan or consolidation plan because hidden fees could make your final payoff amount much higher than expected.

Do research about companies


Before you consolidate your debt, it’s important to get information about all of your credit card companies. Do they charge fees? How long do they report balances to credit bureaus? How long do late payments remain on your credit report? Can you negotiate a lower interest rate or better terms for any of them? The more research you do about these factors, and others that are specific to your situation, will help determine whether consolidation is worth it for you. For example, if you have no chance of qualifying for a lower interest rate with one company, then there’s no point in consolidating because doing so won’t save money—it will just shuffle around how much interest you pay over time.

Get a firm quote from at least three companies


When you’re applying for consolidation, it’s important to understand exactly what services you’ll be getting and how much they will cost. Once you have a firm quote, it’s up to you to decide whether or not you want to go through with your application. Getting a quote is fairly easy—you just need to contact at least three companies and request one. As long as your credit scores are high enough (around 700 or higher), most companies should be willing to help and provide information about their rates and programs. Keep in mind that most of these types of loans have variable interest rates that can change, so make sure you ask about all of these details before agreeing on anything.

Look for hidden costs or fees


No matter what kind of loan you’re taking out, make sure you know how much you’ll be paying in interest and fees. If possible, ask your lender to put all fees in writing before you sign any paperwork or give them any money. If they won’t do that, don’t sign anything until they do—it could save yourself thousands of dollars in hidden costs. Although credit cards are a form of debt, there are instances when credit card consolidation may be a viable option for paying off debt quickly with lower interest rates and fewer fees than other options like consolidation loans and personal loans.

Know your rights as a consumer


Consumers have specific rights and legal protections that don’t apply to businesses. The first thing you should do is familiarize yourself with these rights so you can avoid being taken advantage of by aggressive companies. Here are a few resources for you: Consumer Financial Protection Bureau, Federal Trade Commission and National Association of Consumer Advocates.

Pick the right company based on your situation


While there are plenty of companies that offer credit consolidation and debt management, it’s important to pick one that’s right for you. There are a few different options: debt settlement, debt management or credit counseling. Each option comes with its own advantages and disadvantages. This will also vary depending on where you live—each state has specific rules when it comes to consumer finance companies, so research your options before proceeding.



Remember, credit consolidation isn’t right for everyone. Some experts suggest that consolidation might not be ideal if you’re only dealing with a few small debts—in those cases, it might be better to work through your debt in order of size and principle. That said, consolidation can allow you to deal with all of your debts at once while making larger payments that may be easier on your budget. The key is weighing how much debt you have versus how much debt you want to pay off quickly.

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