What is Debt Consolidation, and is it Right for You?

What is Debt Consolidation, and is it Right for You?

July 22, 2020

Tagged As: Personal

According to Debt.org, credit-card-carrying American households owe $15,000 on average in credit card debt alone, and the Federal Reserve Bank estimates Americans will exceed the nation's record high ($12.68 trillion) in total debt which peaked during the 2008 recession. To make matters worse, all of these calculations were made before the onset of COVID-19. As Americans rely more on credit cards to make ends meet during tough times, these alarming numbers stand to only go up.

 

With high interest rate debt increasing rapidly, households may stand to benefit and save big-time by consolidating debt into lower interest rate loans. If you are thinking about consolidating debt – whether to simplify monthly payments or save on interest – consider these following tips.

 

Address Deeper Concerns

If you devote too much monthly cash to certain bills, have a spending problem, or simply operate without a household budget, you could wind up swiftly needing another loan to consolidate more debt. A debt consolidation loan works best with a balanced budget and responsible spending. There are several tools available to help you budget and track your spending, including the Manage My Finances tool within Hills Bank Online. By using Manage My Finances, you can include accounts from other financial institutions, add credit cards, set savings goals, and create budgets.

 

There’s a Difference Between Consolidation and Settlement – And It Affects Your Credit Score

A consolidation loan moves all or some of your existing debt into a single, manageable loan, whereas a debt settlement occurs when a creditor agrees to forgive a debt after receiving less than full payment. On a credit report, settlements appear as "Settled" or "Paid Settled," rather than "Paid in Full." Although credit scores change at highly variable rates depending on all sorts of different factors, according to these hypothetical credit report scenarios released by FICO, a single debt settlement has the power to significantly affect your credit score – whether it is currently high or low.

 

Also, keep in mind that the credit score formula is set to change sometime this year, placing a larger penalty on the scores of those who rely heavily on loans and credit cards to cover existing debt.

 

Be Smart When Selecting Debts for Consolidation

One major perk of debt consolidation is that it reduces the number of payments you have to manage each month. Consolidating debt simply to reduce the number of payments you make monthly, though, is not always the best financial decision. A consolidation should also save you money in interest and fees so it might be better to consolidate only debts with higher interest rates and consider setting up auto-payments for the rest.

 

 

Avoid Over-Using Credit Cards

Once you have consolidated your debt, especially credit card balances, it can be tempting to begin charging items again. Although one small purchase does not create an unmanageable balance, several minor expenses add up quickly. Because you may still owe the same amount as before consolidating your debt, it might be beneficial to refrain from relying too heavily on your credit cards if possible.

 

That said, credit cards can be a lifeline when cash isn’t easily accessible. For many people right now, using credit cards is not optional, but necessary. If you typically carry a balance on your card from month to month, it might be worthwhile to use a credit card with a lower interest rate. We offer several credit card options to meet our customers’ needs, including those looking for low-interest options. 

 

Build an Emergency Fund

A key factor in avoiding high interest rate credit card debt after consolidating your existing debts is to have a financial plan in place to handle emergency expenses. For example, consider starting a savings account to cover unexpected costs in the event of a medical emergency, car repairs, or an unexpected loss of income. A good rule of thumb is to aim for $1000 to start, then shoot for three months of expenses, six months, and a year.

 

You can also consider building an emergency fund with Goals, a new feature in Hills Bank Online.

 

 

Goals lets you set a savings target for whatever you want to save for, then gives you real-time updates on your progress. Simply choose a category or create your own, enter in your target date and goal amount, and accept the prompt to allow automatic transfers that are calculated to meet your goal. It’s a simple, automated way to build your emergency fund without having to open a new account.

 

If you have multiple monthly payments, high interest rate debts, such as credit cards, or feel like you could benefit from a potentially lower monthly payment, then a debt consolidation loan might be right for you. For more information about managing and consolidating your debt, you can stop by any of our locations or get in touch with a banker through the HERE by Hills Bank app about applying for a personal loan or automating your monthly payments.