September 9, 2020

What’s the Best Time to Consolidate Debt?

The short answer is “the sooner the better.” If your debt is growing consistently, it’s only a matter of time before it becomes a problem. But it can be hard to tell if your debt really is growing when it’s spread across credit cards, student loans, auto loans, and more. In many cases, people aren’t aware of debt problems until they become too big to ignore.

It’s something that Senior Member Services Specialist Monica Richards has seen many times in her work at Tulsa FCU.

“A lot of times, when someone comes in to us to talk about debt consolidation we could have helped them much more easily if they had come to see us months before,” she says.

What is Debt Consolidation?

Debt consolidation is the process of taking multiple, smaller debts and combining them into one debt, which allows for a single monthly payment paired with a lower interest rate.

This typically helps you save money in the long run, consolidates credit card debt and other unsecured debt, and lowers interest rate payments in total.

“Ideally, when you consolidate several, smaller debts into one debt, you will reorganize multiple bills with different interest rates, different payments, and different due dates into one monthly payment with a lower interest rate,” she said. “This will not only streamline your life and make bill paying much easier, it will allow you to pay off your total debt faster and with less money paid towards interest.”

Signs that It’s Time to Consider Debt Consolidation

If sitting down and crunching the numbers across all of your credit cards and loans sounds like a big job, that might the first sign that consolidating them all into one lower-interest debt makes sense.

Before you break out the calculator, there are some easy-to-recognize signs that debt consolidation could be the right move for you.

You’re Struggling to Make Some of Your Monthly Payments

How difficult it is to make your payments every month is a good indicator for most people if a debt problem is developing.

“When you see that your debt is no longer allowing you to comfortably and easily make payments each month,” Monica says, “come and see us.”

Requesting a debt consolidation appointment with Monica or one of our other Member Service Specialists is an easy way to understand your unique situation and what solutions are available.

One of the main problems that debt consolidation solves is reducing the number of different payments you have to make each month. That means less worrying about your cash flow, making it easier to plan and stick to your budgets.

You Have a Solid Plan to Avoid Getting Back into Debt

Consolidating your debt is one step on the way to freedom, but it’s important to have a plan to avoid running up further debt. If you continue to add debt to your credit cards after paying them off with a consolidation loan, you’ll soon be stuck in the same cycle as before.

You’re Losing Too Much Money to High Interest

Are you keeping a balance on your credit card that is making it hard to catch up?

Since interest doesn’t go toward paying off the debt’s principle, the money you pay in interest doesn’t really help you on the path to debt freedom. The less you pay in interest, the more you can pay toward the debt itself. Over months or years, that money really adds up. Try taking a look at your last few credit card statements and adding up the interest charges.

If the interest charges add up to a number that is hard to even look at, it’s a good sign that consolidating to a lower interest rate would help you get out of debt.

If you consolidate several higher-interest debts to a single, lower-interest debt, the savings over time could be significant.

Your Credit Score is High Enough to Qualify a Credit Card or Consolidation Loan

If you haven’t checked your credit score in a few months (or years), it’s a good idea to get a sense of your number before tackling your debt. Tulsa FCU members can check their credit score for free by clicking Check Your Score in Online Banking. There are also other free credit report options online.

If your score is on the low side (under 600) you may have more trouble qualifying for some debt consolidation loans or credit cards, but don’t let your score stop you from getting a handle on your debt.

Some lenders are willing to work with bad credit scores, so even if you’re under 600, it’s a good idea to talk to someone you trust about your options for debt relief. If you don’t qualify for a debt consolidation loan or balance-transfer credit card, your credit union or bank may suggest other options like deposit secured loans to help you build credit.

Debt Consolidation Options

The two most common ways to consolidate debt are balance transfer credit cards and fixed-rate debt consolidation loans.

How to Consolidate Debt with a Balance-Transfer Credit Card

If you have good or excellent credit and just need to pay off some existing debt quickly and with less interest, this is a solid way to save money and consolidate your debt. By transferring debts to a single credit card, you will have time to pay off the balance during the typical introductory period of zero interest.

This credit card balance transfer option usually has a balance transfer fee or an annual fee, so it’s a good idea to account for these fees and make sure that you will still save more money on interest than you will pay in transfer fees.

If you do choose a credit card to consolidate debts, watch your calendar carefully. A higher interest rate will usually kick in 12 or 18 months after consolidation. That’s why it’s a good idea to put together a budget plan that includes payments to take care of your consolidated debt before the interest-free introductory period ends.

How to Consolidate Debt with a Consolidation Loan

A fixed-rate consolidation loan can be a great way to lower your interest and simplify your payments for easier budgeting and less stress paying off your debt. A debt consolidation loan works much the same as a standard loan, but it is used to pay off your various debts and consolidate them into one loan. Your credit union or bank will probably look for ways to use collateral to lower your interest rate as well. If you put up collateral for the loan you may be able to secure a lower interest rate.

Other Debt Consolidation Options

If you have equity in your home, a home equity line of credit could be a lower-interest way to consolidate debt. In some circumstances, it may also help you to make a one-time loan from your 401k.

No matter what option you choose, remember that no option is risk-free.

“Each loan comes with its own risk,” Richards says. That’s why it’s important to sit down with your credit union or bank and make a reasonable plan.

“Be certain you work with your loan officer to create terms and conditions you can be sure to meet – if you use your car or home or something valuable in your life as collateral, and you default on your consolidation loan, you’ll lose those things as well.”

Start Early, and Ask the Experts

No matter what debt consolidation plan you choose, Richards told us that early communication with your financial institutions and your debtors is the most important aspect.

“Be proactive,” Richards said. “If you don’t like where you are in life, you don’t have to stay there. Let’s have a conversation and see what options you have. There are a lot more than you think.”

Most credit unions and banks offer complimentary debt-consolidation appointments. Making an appointment to talk to someone at a financial institution you trust is an easy way to understand your unique situation and decide if debt consolidation is right for you.

This article is for educational purposes only. Tulsa FCU makes no representations as to the accuracy, completeness, or specific suitability of any information presented. Information provided should not be relied on or interpreted as legal, tax or financial advice.