The vast majority of Americans carry some kind of debt. For many people, this debt comes in the form of revolving credit, like credit cards. A surprisingly high number of the people who carry credit card debt only make the minimum payment due each month, putting them in a situation where it feels like it can take forever to get out from under the burden of constant credit card bills.
There are a few different options for people who are having problems paying down their debt. Two of the most popular options are debt consolidation and debt management. This guide will cover both options so you can understand what choices you have when it comes to conquering your debt. We’ll discuss debt consolidation loans and debt management programs, and help you decide which option is the best for your particular situation.
Evaluating Debt Relief Options
When it comes to choosing a debt relief option, two of the best solutions are debt consolidation loans and debt management programs. If you’re trying to decide how to approach your debt there are a few things you should considering, including:
- What form your debt is in – do you have lots of credit card debt, student loans, car payments? Knowing what kind of debt you have can help you select the best option for debt relief.
- How much you pay each month – you need to know what your monthly payments are so you can make a good comparison between debt relief options.
- Your credit situation – is your credit score good, bad, or just ok? Different credit scores open up different debt relief options for consumers.
- What your goals are – are you looking to get out of debt in five years? Ten? Do you just want to lower your payments or your interest rate? Different goals are best addressed by different debt relief options.
Debt Consolidation Loans
A debt consolidation loan is a preferred way of resolving debt for consumers with average to good credit. A consolidation loan works by taking out a loan for the payoff value of your current debts. The consolidation lender pays your current creditors, and you only have to keep track of the consolidation loan payment instead of managing multiple other payments.
Therefore, consolidation loans make keeping track of your finances a much simpler process. Furthermore, many consolidation loans will offer interest rates lower than you get on other kinds of debt like credit cards. As a result, you can get a lower monthly payment and pay less on your debt over the course of repayment with a consolidation loan than you might pay with credit card or other debt.
Consolidation loans also can help your credit score. While taking the initial loan might cause a small hit to your score, altering the mix of installment and revolving credit in your profile can boost your score. Moreover, turning revolving debt into installment debt lowers your credit utilization. This can have a huge positive impact on your credit score.
Debt consolidation loans come in all shapes and sizes, and there are many debt consolidation options that are specific to certain kinds of debts. Credit card consolidation and student loan consolidation are two of the most popular options, but there’s probably a debt consolidation loan designed for people who have the same kind of debt as you do.
Debt Management Programs
If you don’t want or can’t get a debt consolidation loan, then debt management programs are another great option. A debt management program involves working with a debt or credit counselor to craft a budget that lets you pay off your debt at the fastest possible rate.
Additionally, debt management programs nearly always include credit or debt counseling. This type of educational service is invaluable, as people aren’t taught about credit and debt in school. Even if you received some kind of basic introduction to credit and debt, there’s a good chance you weren’t prepared to navigate the complex world of modern finance.
Debt management programs teach you how credit and debt work, so you can make informed decisions about your finances. A qualified credit or debt professional can help you select financial products that will improve your situation. Moreover, if you’re having problems qualifying for these products, the very same professionals can help you manage your finances in such a way that you will be able to qualify for them.
Debt management programs don’t work to reduce your interest rate or monthly payments. Furthermore, unless the debt management company you’re considering offers a bill consolidation service, you’ll still have to keep track of when your payments are due and what the amounts are. However, with the assistance of a qualified professional, you’ll be better equipped to deal with this challenge.
Making a Decision
When making a decision about what debt relief option is best for you, it is important to consider a few different things. First, what kind of financial products can you qualify for, and second, what kind of interest rates can you get from a debt consolidation option.
If you can’t qualify for a debt consolidation loan, then a debt management program is pretty much your only option. However, if you can qualify for a debt consolidation loan, you’ll want to compare the interest rate on the loan to the interest rates on your current debt. Specifically, you should compare the average interest rates of your outstanding debts. This will give you a good idea of how much money you can save each month and over the course of repayment with a consolidation loan. If the amount of money you’ll save with a consolidation loan makes it worth your time and energy to apply for and obtain one, then that’s usually a good option.
The Importance of Financial Education
It’s important to note that these options aren’t exclusive. You can seek a consolidation loan while doing a debt management plan. In fact, it’s always a good idea to expand your financial education if you’re having problems with bills or money. That’s why we always recommend that you seek debt relief options in conjunction with advice from a certified credit or debt professional to ensure you know what you’re getting into and that the steps you’re taking are the right ones.