Credit card refinancing vs debt consolidation

If credit card debt is causing you problems, debt consolidation could be the solution. Find out how to lower interest rates and reduce monthly payments while eliminating your debt.

Debt consolidation is combining several unsecured debts — credit cards, medical bills, personal loans, payday loans, etc. — into one bill. Instead of having to write checks to 5–10 creditors every month, you consolidate credit bills into one payment, and write one check. This helps eliminate mistakes that result in finances charges like late payments.

Note: Debt consolidation is commonly referred to as credit consolidation. There are three major types of debt consolidation: Debt Management Plans, Debt Consolidation Loans and Debt Settlement. These are not quick fixes, but rather long-term financial strategies to help you get out of debt. When done correctly, debt consolidation can:

  • Lower your interest rates
  • Lower your monthly payments
  • Protect your credit score
  • Help you get out of debt faster

Making the decision to consolidate debt is the first step. Ignoring your debts will not make them go away; it will make your problems worse. The sooner you get help with your credit card debt and make a plan to repay, negotiate, or consolidate them, the sooner you’ll be living a life free of debt.

A debt management plan or debt settlement should be your top options for consolidating your credit card debt, but alternatives include obtaining a debt consolidation loan, borrowing from your retirement funds or the equity in your home, and consolidating your student loans. While you can't consolidate federal student loans with other debts, including private school loans, lending institutions can consolidate private education loans with other sources of debt.

Financial advisors tend to lean away from turning unsecured debt into secured debt, so utilizing home equity is often not considered the best option. You risk losing some or all of the assets you used to secure the debt. Similarly, you should explore all other options before choosing to withdraw money from tax-free accounts you set up for your retirement.

Debt consolidation works by combining multiple debts into one account and making a single, on-time monthly payment until all the debt is eliminated. Debt management plans, debt consolidation loans and debt settlement programs are the primary ways to consolidate debt, but there are several other options available (credit card balance transfers, home equity loans, personal loans, online lenders, etc.), depending on how desperate your situation is.


What Is The Best Way to Consolidate Debt?

How much money you owe and your available resources dictate the best option for consolidating debt.

If your credit card debt is over $5,000, a debt management plan or debt consolidation loan are very good choices. Both plans are based on reducing interest rate paid on the debt, thus making it easier to afford monthly payments. The difference is that there is no loan involved in a debt management plan.

If your credit card debt has ballooned to an unmanageable figure - a number so high that you can barely afford the minimum monthly payments - debt management and a debt consolidation loan are still in the mix, but it would be wise to add debt settlement. If you own a home, a home equity loan also is an option.

If your credit card balance is under $5,000 - and you're committed to pushing it down to zero - a zero-percent interest credit card balance transfer would be another choice. However, those cards usually go to customers with very high credit scores, charge a 3%-5% balance transfer fee and have an introductory period lasting 12-18 months before regular interest rates apply.

Most financial experts agree that a Debt Management Plan (DMP) is the preferred method of debt consolidation. The most-recommended DMPs are run by non-profit organizations. They start with a credit counseling session to help determine how much money you can afford to pay creditors each month. The non-profit agency can help you get a lower interest rate from creditors and reduce or waive late fees to help make your monthly payment affordable. You send one payment to the agency running the DMP and they split it among all your creditors. Utilizing a debt management plan could affect your credit score. However, at the end of the 3-to-5 year process, you should be debt free, which definitely improves your score.

A Debt Consolidation Loan (DCL) allows you to make one payment to one lender in place of multiple payments to multiple creditors. A debt consolidation loan should have a fixed interest rate that is lower than what you were paying, which reduce your monthly payments and make it easier to repay the debts. There are several types of DCLs, including home equity loans, zero-interest balance transfers on credit cards, personal loans, and consolidating student loans. It is a popular way to bundle a variety of bills into one payment that makes it easier to track your finances. There are some drawbacks — you could face a longer repayment period before you finish paying off the debt — but it’s definitely worth investigating.

How to Get the Best Consolidation Loan

Credit unions typically offer the best rates for debt consolidation loans because they are nonprofit organizations and are owned by their members.

If you have a good relationship with your local bank, that is another choice, but banks are for-profit companies who rely heavily on credit scores to set their interest rates. At the very least, you should compare their rates to credit unions before making a decision.

If you have bad credit and aren't successful with credit unions or banks, online lenders could be a better place to borrow. Many online lenders are flexible with their qualifications as long as you are willing to pay a higher interest rate.

The key is to know how to consolidate your bills. Start by listing each of the debts you intend to consolidate - credit card, phone, medical bills, utilities, etc. - and what the monthly payment and interest rates are on those bills. It also helps to know your credit score.

Once you have this information, make sure to compare lender's rates, fees and payoff period before making a decision. A consolidation loan should reduce your interest rate, lower your monthly payment, and give you a practical way to eliminate debt.

How to Consolidate Credit Card Debt on Your Own

If you have a very good credit score (700 or above), the best way to consolidate credit card debt is to apply for a 0% interest balance transfer credit card. The 0% interest is an introductory rate that usually lasts for 6–18 months. All payments made during that time will go toward reducing your balance. When the introductory rate ends, interest rates jump to 13–27% on the remaining balance. Be aware, however, that balance transfer cards often charge a transfer fee (usually 3%), and some even have annual fees.

Another DIY way to consolidate your credit card debt would be to stop using all your cards and pay using cash instead. This can allow you to set aside a portion of your income each month to pay down balances for each card, one at a time. When you have paid off all the cards, choose one and be responsible with how you use it.

Bill consolidation is an option to eliminate debt by combining all your bills and paying them off with one loan. With bill consolidation, you make only one monthly payment — a good idea for when you have five, or maybe even 10 separate payments for credit cards, utilities, phone service, etc. If you consolidate all bills into one, the single payment should be at a lower interest rate and reduced monthly payment. Any savings could be used to start an emergency fund to help prevent a future financial crisis.

How Can I Consolidate My Bills?

Debt and bill consolidation takes patience, persistence and some organizational skills. You must start by gathering all your bills for things like medical, credit card, utilities, cell phones. Add the total amount owed on the unsecured debt. The next step is to determine how much you can afford to pay on a monthly basis, while still having enough to pay basics such as rent, food and transportation.

When you have that number, decide whether a personal loan, debt management program or debt settlement gives you the best chance to eliminate the debt. Understand that this process normally takes between three to five years. There are no easy fixes with debt consolidation.

Should You Consider Debt Consolidation?

Debt consolidation is an appealing way to simplify your bill paying responsibilities and eliminate debt, but there also is a risk that things could get worse if you don't choose the appropriate method and stay committed to the process.

The three major methods of debt consolidation - debt management, a debt consolidation loan and debt settlement - each require time to complete and a behavior change that makes paying off debt more important than accumulating more of it.

For example, a debt management program can dramatically reduce interest rates you pay on credit card debt and eliminate it in 3-5 years. However, if you fall behind on the expected monthly payments, the creditors who granted those major concessions, can revoke them immediately and you are in trouble again.

If you go with a secured debt consolidation loan using your home or car as collateral, the lender should offer an interest rate considerably better than what you're paying on credit card debt. But again, failure to make on-time payments could mean losing the home or car, which obviously makes you worse off than before.

If you decide to use debt settlement, you might reduce your debt by as much as 50%, but your credit score will take a severe hit that will last seven years. That could make it difficult to get a loan for a car or home in that time.

For debt consolidation to work, you must calculate how many payments it will take to eliminate the debt and how much interest is included in those payments. Compare that number to what you would pay under your current plan.

If you are not really committed to making on-time payments and changing the habits that got you into financial trouble, the cost and time for debt consolidation may make the situation worse.

How does a debt management program compare with a debt consolidation loan?

The major difference is you do not take out a loan for a debt management program. Both are set up to pay off debts in a 3-to-5 year time frame. A debt management program is designed to eliminate debt by educating the consumer to change their spending habits and working with creditors to reduce the interest rate and fees associated with the debt. In a debt consolidation loan, the consumer borrows enough money from a bank or credit union to pay off unsecured debts. The consumer must repay that loan and whatever fees are associated with it.

What is debt consolidation refinancing?

It means including other debts in a refinancing of your home. If you have $10,000 in credit card debt and owe $90,000 on your home, you would refinance the home for $100,000 and use $10,000 of that money to do a one-time payoff of your credit card debt. This is only a valuable if you have equity in your home (market value is higher than mortgage balance) and you receive a lower interest rate and monthly payment on your new mortgage.

What type of loans can I consolidate?

Any unsecured debt, which includes credit cards, medical bills or student loans.

Any unsecured debt, which includes credit cards, medical bills or student loans.

Depending on the amount owed, the best consolidation loans are credit card balance transfers, personal loans, home equity loans and an unsecured debt consolidation loan. A good-to-excellent credit score is needed for credit card balance transfers. Peer-to-peer online lending has become a good outlet for personal loans. A home equity loan is a secured loan, which means better interest rates, but you are in danger of losing your home if you miss payments. An unsecured debt consolidation loan means not risking assets, but you will pay a higher interest rate and possibly receive a shorter repayment period.

What Does Debt Consolidation Do Your Credit?

In most cases, your credit score will go down with debt consolidation, but how long it stays down is really up to you. The two major factors are a) which debt consolidation program you use; and b) how committed are you to making on-time payments?

If you choose a debt management program, for example, your credit score will go down for a short period of time because you are asked to stop using credit cards. However, if you make on-time payments in a DMP, your score will recover, and probably improve, in six months.

If you choose a debt consolidation loan, your poor payment history already has dinged your credit score, but paying off all those debts with a new loan, should improve your score immediately. Again, making on-time payments on the loan will continue to improve your score over time.

Debt settlement is a no-win choice from the credit score standpoint. You score will suffer immediately because debt settlement companies request that you send payments to them and not to your creditors. That's a big problem. So is the fact that a debt settlement stays on your credit report as a negative consequence for seven years.

What are the best loans for debt consolidation?

Depending on the amount owed, the best consolidation loans are credit card balance transfers, personal loans, home equity loans and an unsecured debt consolidation loan. A good-to-excellent credit score is needed for credit card balance transfers. Peer-to-peer online lending has become a good outlet for personal loans. A home equity loan is a secured loan, which means better interest rates, but you are in danger of losing your home if you miss payments. An unsecured debt consolidation loan means not risking assets, but you will pay a higher interest rate and possibly receive a shorter repayment period.

When is debt consolidation the right option?

When the monthly payment and interest rate on the consolidation loan are lower than the what you were paying every month and the payoff for eliminating debt comes within five years.

A debt consolidation loan only works if you are able to reduce the interest rate and monthly payment you make on your bills and change your spending habits. The loan won’t work if you continue spending freely, especially with credit cards.

If you are overwhelmed with unsecured debt (e.g. credit card bills, personal loans, accounts in collection), and can’t keep up with the high interest rates and payment penalties that normally accompany those obligations, debt consolidation is a viable debt relief option. It allows you to focus on making one monthly payment, ideally at a lower interest rate. However, you need to be highly-motivated to eliminate debt and disciplined enough to stay on a program that could take 3–5 years before you are debt-free.

How do I consolidate debt and pay it off?

The first step is to list the amount owed on your monthly unsecured bills. Add the bills and determine how much you can afford to pay each month on them. Your goal should be to eliminate debt in a 3-to-5 year window. Reach out to a lender and ask what their payment terms – interest rate, monthly payment and number of years to pay it off – would be for a debt consolidation loan. Compare the two costs and make a choice you are comfortable with.

It can be if you don’t change the habits that caused your debt. If you continue to overspend with credit cards or take out more loans you can’t afford, rolling them into a debt consolidation loan will not help.

Are debt consolidation loans taxable?

The IRS does not tax a debt consolidation loan. More importantly, it does not allow you to deduct interest on a debt consolidation loan unless you put up collateral, such as a house or car.

Who qualifies for debt consolidation loans?

Anyone with a good credit score could qualify for a debt consolidation loan. If you do not have a good credit score, the interest rate charged and fees associated with the loan, could make it cost more than paying off the debt on your own.

Does debt consolidation work on a limited income?

Debt consolidation loans are difficult for people on a limited income. You will need a good credit score and sufficient monthly income to convince a lender that you can afford payments on the loan. A better choice might be to consult a nonprofit credit counselor and see if you are better served with a debt management program.

What do debt consolidation companies do?

Debt consolidation is a term applied to several branches of debt relief. Some companies offer credit counseling and debt management programs. Other debt consolidation companies do debt settlement. Banks and credit unions do debt consolidation loans. Each has benefits/drawbacks, depending on the specifics of your situation.

Which debt consolidation plan is right for me?

There are so many choices available that it is impossible to single out one. The Federal Trade Commission recommends contacting a non-profit credit counseling agency to determine which debt consolidation plan best suits your needs. The credit counselors educate consumers about debt and offer options to eliminate it. Credit counselors are available for over-the-phone or in-person interviews, and their service is usually free.

Can I consolidate my debt without a loan?

Yes. A debt management program (DMP) is designed to eliminate debt without the consumer taking on a loan. A credit counseling agency takes a look at your monthly income and works with creditors to lower interest rates and possibly eliminate some fees. The two sides agree on a payment plan that fits your budget. This is not a quick fix. DMPs normally take 3-5 years, but by the end, you eliminate debt without taking on another loan.

Do lenders perceive debt consolidation negatively?

Most lenders see debt consolidation as a way to pay off obligations. The alternative is bankruptcy, in which case the unsecured debts go unpaid and the secured debts (home or auto) have to be foreclosed or repossessed. Lenders don’t like either of those choices. You may see some negative impact early in a debt consolidation program, but if you make steady, on-time payments, your credit history, credit score and appeal to lenders will all increase over time.

Debt Consolidation vs. Debt Settlement

These two repayment methods are often confused with each other, but they are vastly different.

Debt settlement companies promise to negotiate a lump-sum payment with each one of your creditors for less than what you actually owe. While this sounds ideal, there are drawbacks. Many creditors refuse to deal with debt settlement companies and debt settlements have a huge negative impact on your credit score.

Debt consolidation means taking out a single loan to pay off several unsecured debts. You make one payment to the lender each month, instead of multiple payments to multiple lenders. Debt consolidation has a positive impact on your credit score as long as you don’t miss any payments.

Debt settlement companies, on the other hand, ask clients to stop paying creditors and instead send a monthly check to the settlement company that is deposited in an escrow account. When the account reaches a specific dollar goal — this sometimes takes as long as 36 months – the settlement company steps in and makes its offer to the creditor. The creditors are not bound to accept the offer. Late fees and interest payments also accumulate during this time, making the amount owed much larger.

If you choose to use a debt settlement company, you should not pay any fees until the debt has been settled. Be sure they put in writing how much you pay in fees and how long the process will take. Remember that creditors can refuse to deal with settlement companies.

If you choose a debt consolidation company, be sure to get their fees and interest charges in writing.

Will debt consolidation lower your monthly payment or save money on interest? Enter the terms on a debt consolidation loan, then enter your current terms for each individual debt. The debt consolidation calculator will calculate the monthly payment and total interest for your debts with and without a debt consolidation loan.

Credit Counseling Vs. Debt Consolidation: Which is Best for You?

October 21st, 2015

You’ve heard about credit counseling, and your credit card company urges you to “consolidate debt with a balance transfer” every month. Which should you choose? Credit counseling versus debt consolidation depends on how much you owe, your credit scores and whether or not you have enough credit to roll all of your accounts into one loan or credit card balance. If your cards are maxed and you’ve missed a payment a couple of times, credit counseling that includes a debt management plan could be your best option.

Debt Consolidation: Roll Several Payments into a Single Payment

Whether you use a credit card to transfer balances to one account or take out a debt consolidation loan, you can simplify bill paying by rolling several account balances into one new account. Credit card companies typically offer balance transfers with a low or no interest rate for a specific introductory period. You may save on balance transfers if you can pay off the full amount during the introductory period, but balance transfers typically include a transfer fee for each balance you transfer, and card issuers typically do not allow balance transfers from any cards issued by their own companies. Balance transfers provide a great way to clean up multiple credit card balances, but if you need major funding for debt consolidation, a personal loan or debt consolidation loan can be a good choice.

A debt consolidation loan is typically made for a specific amount with a fixed interest rate and payments for a specific period of months or years. How much you can borrow depends on your credit scores and reports, income, and employment status. If you have good credit, a personal loan can help clean up credit card balances, medical bills and other expenses that add to your bill-paying chores.

Another option for consolidating debt is a personal line of credit. This option provides a predetermined maximum credit line, but you can draw against it as needed. You are only charged interest on the amount you use. Additional fees may apply, and personal credit lines typically have variable interest rates. It’s important to be sure you understand how and when an adjustable rate can change.

Mortgage Refinance, Home Equity Loans and Lines of Credit

If you own a home and have enough equity, you might want to consider refinancing your mortgage for enough cash out to pay off all of your bills. Refinancing requires replacing your old mortgage with a new home loan and requires payment of closing costs. Home equity loans and lines of credit can also be used for debt consolidation and they generally cost less than refinancing your mortgage. You can draw on a home equity line as funds are needed or apply for a home equity loan for a specific amount to pay off all of your creditors at once.

The Federal Trade Commission advises homeowners that borrowing against home equity for debt consolidation involves risks. If you fail to repay on a refinanced mortgage, home equity loan or home equity line of credit, you could lose your home to foreclosure. If you’re inclined to spend beyond your means, you could end up owing more on home loans along with more debt. If you have problems with budgeting and overspending, a professional credit counseling agency may be able to help restructure your budget and arrange a debt repayment plan with lower interest rates and payments.

Credit Counseling versus Debt Consolidation: Kick the Debt Habit for Good

It’s no fun to be neck-deep in debt with your finances managing your life instead of you managing your finances. Credit counseling services provide help with establishing a cash-based household budget. After reviewing your income and expenses, credit counselors can contact your creditors to arrange an affordable repayment plan. In some cases, you may pay less interest or fees may be waived by creditors to help you pay off your debt faster. Here are things to know about credit counseling agencies in general. Policies may vary, so if one credit counseling service can’t meet your needs, continue shopping until you find the right credit counseling program according to your needs.

  • Not all credit counseling services are nonprofit. Fees for credit counseling are established by each agency. Nonprofit credit counseling services may or may not charge less than for-profit agencies.
  • HUD-approved housing counselors can also help with credit counseling. If you’re having problems making mortgage payments, a HUD-approved housing counselor can help you work out a repayment plan or other option with your mortgage company; they can also help with budgeting and debt repayment plans.
  • Do not confuse debt management with debt settlement. Debt management programs are administered by credit counseling companies who work with your creditors to make affordable repayment arrangements. Debt settlement programs typically require you to stop making payments to creditors while a debt settlement agent negotiates a settlement agreement on your behalf. There are no guarantees that creditors will agree to a debt settlement offer, and FICO advises that the longer you don’t make payments, the worse the damage to your credit scores.

Whether your’re looking for a debt consolidation loan, home equity loan or a credit counseling service, it pays to shop and compare lenders and credit counseling agencies. A professional financial planner can help you find your best option based on your circumstances.

4 Ways to Consolidate Credit Card Debt

Debt consolidation is a strategy to roll multiple old debts into a single new one. Ideally, that new debt has a lower interest rate than your existing debt, making payments more manageable or the payoff period shorter.

The option that best suits you depends on your overall debt load, credit score and history, available cash and other aspects of your financial situation, as well as your self-discipline. Consolidation works best when your ultimate goal is to pay off debt.

The four most effective ways to consolidate credit card debt are:

This type of credit card charges no interest for a promotional period, often 12 to 18 months, and allows you to transfer all your other credit card balances over to it. You’ll need a good to excellent credit score — above 690 — to qualify for most cards.

You’ll need a good to excellent credit score — above 690 — to qualify for most cards.

Make a budget to pay off your debt by the end of the introductory period, because any remaining balance after that time will be subject to a regular credit card interest rate.

Most issuers charge a balance transfer fee of around 3%, and some also charge an annual fee. Before you choose a card, calculate whether the interest you save over time will wipe out the cost of the fee.

  • Requires good to excellent credit
  • Usually carries a balance transfer fee
  • Interest kicks in typically after 12 to 18 months

You can use an unsecured personal loan from your local bank or credit union or an online lender to consolidate credit card or other types of debt. The loan may give you a lower interest rate on your debt or help you pay it off faster.

The lowest personal loan rates go to those with the best credit; rates top out at 36%.

NerdWallet recommends visiting your local credit union first. Most credit unions offer their members flexible loan terms and lower interest rates than online lenders, especially if you have a low credit score. The maximum annual percentage rate at a federal credit union is 18%.

Online lenders typically let you apply for a debt consolidation loan without affecting your credit score. Most will give you a rate without a “hard inquiry” on your credit, unlike many banks and credit unions.

For online lenders, the lowest rates go to those with the best credit; rates top out at 36%. Lenders don’t charge fees for paying off your loan early, but they may charge upfront origination fees that range from 1% to 5% of your loan. Some also send money directly to your creditors, increasing the odds of successful debt consolidation.

  • Fixed interest rate and monthly payment
  • Fixed payment period
  • Lowest rates go to those with excellent credit
  • May carry an origination fee

3. Home equity loan or line of credit

If you’re a homeowner, you can take out a loan or line of credit on the equity in your home. A home equity loan is a lump sum loan with a fixed interest rate, while a line of credit works like a credit card with a variable interest rate. You can use that money to pay off your credit cards or other debts.

A HELOC typically requires interest-only payments during what’s known as the draw period, which can range from five to 20 years but is typically 10 years. That means you’ll need to pay more than the minimum payment due to reduce the principal and make a dent in your overall debt.

Since both types of loans are secured by your house, you could lose it if you don’t keep up with payments.

  • Lower interest rate than an unsecured loan
  • Does not require good credit
  • Failure to pay could result in losing your house
  • Repayment terms can be 10 years or longer

If you have an employer-sponsored retirement account, it’s not advisable to take a loan from it, since doing so can significantly impact your retirement. However, if you’ve ruled out balance transfer cards and other types of loans, this may be an option for you.

One benefit is that this loan won’t show up on your credit report. But the drawbacks are significant: If you can’t repay, you’ll owe a hefty penalty plus taxes on the unpaid balance, and you may be left struggling with more debt.

401(k) loans typically are due in five years, unless you lose your job or quit, in which case they’re due in 60 days.

  • Lower interest rate than an unsecured loan
  • You borrow money from yourself
  • Loan isn’t counted on your credit report
  • Reduces your retirement fund
  • Heavy penalty and fees if you can’t repay
  • If you lose or leave your job, the loan is due in 60 days

Refinancing vs. consolidating your consumer debt: Which is better?

When you’ve decided it’s time to pay off your consumer debt once and for all, planning is key. It’s a smart idea to start by writing down all of your debt obligations, including each loan or credit card balance, who it’s payable to, the minimum payment and the current interest rate.

From there you can move on to making a plan to get your debt paid off as soon as possible. Among the options to help speed up debt repayment are debt consolidation and debt refinance.

What’s the difference between the two? Is one better than the other? Here’s what you need to know before you agree to consolidate or refinance your credit card or other consumer debt.

Debt refinancing involves moving your debt to a lower interest rate vehicle, either by transferring credit card balances to a credit card with a lower interest rate, transferring debt to a home equity loan product or transferring debt to a lending company.

With debt refinancing, the goal is to lower the overall interest rate that you are paying. For instance, if you have credit card balances with interest rates in the 15% to 20% range, you could refinance those balances to a lending company such as Sofi, Prosper or Lending Club and get a lower rate, typically between 6% and 12% depending on your credit history.

Whichever refinancing option you choose in order to lower the interest rates you are paying on consumer debt, it’s important to look at the fine print so that you clearly understand all fees, closing costs and interest rate rules associated with the new loan option you are considering. It’s wise not to agree to any type of refinance loan until you understand exactly what you are getting.

Debt consolidation typically involves a debt consolidation company that offers to lower your payments and your interest rates on your debt so that you can get your debt paid off more quickly.

It’s important before agreeing to any type of debt consolidation that you understand what you’re walking into. Not all debt consolidation plans are as beneficial as they might first seem.

A basic debt consolidation company will help you to move some or all of your debt to one place with a lower interest rate and a set number of months for the term of the loan. Again, when looking at debt consolidation companies it’s important to understand the terms and conditions of the loan before signing on the dotted line.

Debt settlement differs from debt consolidation in that debt settlement companies work with your creditors to lower balances and interest rates in order to help you get debt paid off quickly. However, many debt settlement companies often charge fees for their services, and debt settlement does affect your credit report negatively.

If you choose to use a debt settlement company (and I only recommend this if you have changed your spending behavior and have exhausted all other means of paying off debt) be sure to do your research and understand the fees involved as well as the impact on your credit report.

Debt management companies use certified credit counselors that help you to create a realistic budget and spending plan, collect a specific amount of money from you each month to be paid toward your debt and work to help you pay off creditors in a way that is comfortable for your financial situation yet gets your debt paid off in a specific amount of time. As with debt settlement plans, debt management plans also have the potential to negatively affect your credit record.

Some debt management companies charge a fee for services, but most reputable companies do not. Again, it’s important to read the fine print before signing any type of an agreement with a debt management company. I would also recommend checking online reviews before making a commitment to a debt management or debt settlement company.

Unfortunately, there are many debt management and debt settlement companies out there that are not as reputable as they would like potential clients to believe. In fact, experts on the subject would tell you that they’re downright scam artists. Here is how you can avoid getting scammed while seeking out debt payoff help.

  • Avoid debt relief companies that ask you to pay a large up-front fee.
  • Avoid companies that offer to remove justified negative reports from your credit card record.
  • Check online for company reviews and with your state’s commerce department to see if the company you are considering working with is licensed. Many states require debt management companies to be licensed.
  • Avoid companies that offer to eliminate large amounts of debt on your behalf.

There are reputable debt relief companies out there. The National Foundation for Credit Counseling is a long-running non-profit organization that accepts membership from reputable debt management centers. When you contact the NFCC, they can help you find a certified credit counseling agency in your area.

Before you refinance or consolidate your debt…

If you’re considering refinancing or consolidating your debt, it’s vital before making any restructuring decisions that you are committed to not borrowing any more money. If you refinance or consolidate your debt and start using your newly freed up credit card available balances, you could end up in even more debt than you started with.

Before you make any decisions to refinance or consolidate your debt, it’s important to get a good budget and spend-tracking plan into place, and to make sure that both you and your spouse are committed to spending within your budget so that your debt can get paid off as quickly as possible. Explore options like the debt snowball or debt avalanche for getting balances paid down quickly.

With proper planning and unwavering commitment, you can be debt free!

Debt Consolidation vs. Refinancing

As you begin your research, comparing debt consolidation to refinancing, it’s important to understand the basic difference: debt consolidation is for someone seeking to pay off multiple debts in one simple payment, and refinancing is a potential strategy for someone who already has a loan.

Let’s take a closer look at the details.

Debt consolidation is a financial strategy that allows you to combine multiple debts into one.

If you’re paying off multiple credit cards, a car loan and personal loans, you’re receiving several bills every month. If you’re paying off multiple credit cards, store cards or medical expenses, the bills come in at different times of the month, which can make planning payments difficult.

Debt consolidation gives you the opportunity to pay all of those bills at once.

Here’s how it works.

When you receive a debt consolidation loan from a reputable lender, you can use those funds to pay your creditors directly.

Now, of course your debt isn’t gone, but it’s now centralized in one location. You can now pay your established lender over time until your debt consolidation loan is paid in full. Not only does this strategy make paying off multiple debts easier and more organized, it also comes with the benefit of various repayment terms and potentially lower interest rates than your higher-interest forms of debt. That’s what debt consolidation is all about.

So to recap: Debt consolidation is a financial strategy with which you can use a personal loan from a reputable lender, like Discover, to combine several high-interest debts into one manageable, fixed payment.

Refinancing is a financial strategy that allows you to receive more favorable terms on an individual loan.

If you have a loan and have been making your monthly payments on time and in full then you might want to explore refinancing. Why? As you continue to pay down the balance, you may be able to refinance your loan.

This could result in a lower payment, lower interest rates or a shorter term depending on your specific situation.

Here’s how it works: If you’re paying your current loan on time every month, you may have improved your credit profile. As your credit profile improves, you may gain better options from reputable lenders. You can typically refinance a personal loan whenever it makes sense.

You can then start shopping for a new personal loan. It’s important to remember that refinancing means applying for a new loan. You may be able to find more favorable terms from either your current lender or a new lender.

So to recap: Refinancing is a financial strategy where you apply for a new loan that is based on your most recent financial behavior, potentially resulting in more favorable terms than your previous loan.

Remember that refinancing is a method to get better loan terms than that of your existing, individual loan while debt consolidation is about getting a loan to combine multiple bills or debts into one. Both can be used effectively to manage your debt load. If you have multiple, high-interest bills, debt consolidation might be the way to go. If you’re just paying off one loan, refinancing may be a wise way to save on future interest payments.

If you have questions, we encourage you to visit our frequently asked questions section.

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