August 8, 2021

Understanding Debt Consolidation: What It Is and How Does It Work

When you are struggling with a pile of credit card debts, car loans, medical bills, or student loans, getting out of debt isn’t that easy. The longer you let it sit, the bigger your debts grow that could make you unable to control it (hopefully not).


The good thing is, there are many ways to get out of debt that will not make you any more miserable. One of those is debt consolidation. This kind of financial strategy will help you decrease it until you’re free from debts.

What is Debt Consolidation?

Debt Consolidation | A girl in debt

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According to Debt.org, debt consolidation is a sensible financial strategy for consumers who are stuck with credit card debt. It can be done with or without a loan. It merges multiple bills into a single debt that is paid off with a consolidation loan or a debt management plan. 


In short, debt consolidation cuts costs by lowering the interest rate on debts and reducing monthly payments. But let me be clear here, debt consolidation does not mean debt elimination. 


This financial strategy reduces the interest rate on your debt and lowers monthly payments, and makes the payment process easier for consumers who are trying to keep up with multiple bills and multiple deadlines from multiple card companies every month.

How does Debt Consolidation work?

NerdWallet says that there are two primary ways to consolidate debt:


  1. Get a 0% interest, balance-transfer credit card: With this strategy, you will transfer all your debts onto this card and pay the balance in full during the promotional period. For you to be qualified, you need good or excellent credit.


  1. Get a fixed-rate debt consolidation loan: Through this strategy, you will use the money from the loan to pay off your existing debts, then pay back the loan in installments over a set period of time. You can qualify for a loan if you have bad or fair credit. However, borrowers with higher scores will likely qualify for the lowest rates.

Is Debt Consolidation worth it?

There’s no one fixed answer to this question as it actually depends on your needs and your capability of paying your debts. But here are the factors to consider before getting your debts consolidated according to the experts Dave Ramsey and NerdWallet:


  • Your monthly debt payments don’t exceed 50% of your monthly gross income.

  • Your credit is good enough to qualify for a 0% credit card or lower interest rate you currently have.

  • You have a consistent cash flow that covers payments toward your debt.

  • There’s no cost to consolidate.

  • Your repayment period will not be longer than the one you have now. 


Struggling with debt can really take a toll on your financial, physical and mental health. The one rule of thumb is that, don’t borrow money if you know you can’t afford to pay it within the given term. 


For more details about debt consolidation, visit www.debtconsolidation.com.


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