What is debt consolidation, and should you consolidate?
Debt consolidation combines multiple debts, such as credit cards and personal loans, into a single loan with one monthly payment. It can reduce the amount of interest you pay overall and reorganize your debt, so you can pay off debt faster and easier. However, a debt consolidation is not a quick fix to your debt problems.
When a debt consolidation loan is a good idea
A successful consolidation plan requires the following:
- Your total debt excluding your mortgage doesn’t exceed 40% of your gross income
- Your credit is good enough to qualify for a low-interest debt consolidation loan
- Your cash flow consistently covers payments towards your debt
- You have a solid plan to prevent running debt up again
When a debt consolidation loan is a bad idea
- Consolidation is not a quick fix to debt problems. It doesn’t address the excessive spending habits that created the need to consolidate in the first place. Schedule an appointment with a United Trades FCU financial coach for help in creating a successful spending and savings plan.
- If your debt load is relatively small and you can pay it off within one year, a consolidation may not save you enough to be worth it. Try the debt snowball method first, see our handy calculators for more information or schedule an appointment with a United Trades FCU financial coach for help in creating a successful payoff plan.
- Consolidation is not the solution if you’re overwhelmed by debt and have no hope of paying it off even with reduced payments. If your total debt is more than half your income, you are better off looking for different options. Schedule an appointment with a United Trades FCU financial coach for more information. We can help you talk to your creditors or look for a credible financial planner.