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7 Best Ways to Consolidate Debt Without Hurting Your Credit

With all the financial stresses that come our way, we can always use some help with debt problems. However, identifying what kind of help you need is as big as actually solving the problem. If you head towards the wrong direction for debt settlement advice, you are bound to get in deeper trouble than you were originally in. So, what is the best way to consolidate debt? The answer to that question is, that there is no right or wrong answer. The best way to consolidate credit card debt varies by individual. It largely depends on your financial circumstances and preferences.

best way to consolidated debt

Is There One Best Wat to Consolidate Debt?

For some, the best way for debt elimination may be paying off smaller balances first. As the second step, you can add payments to those bigger burdens until they are fully paid off.

A second option is to consider transferring balances to one credit card or consider getting a consolidation loan. However, consolidating balances to one credit card or using a loan is a risky move. This is because, if you need to borrow additional money, it may be tempting to use one of the accounts with a zero balance. This opens a window for the debt to grow, even more, creating bigger credit problems. 

What Can I Do to Avoid Falling into Debt?

Prevention is always better than cure. Therefore, before we move on to see the best way to consolidate debt, let’s look at some preventative measures you can take to keep debts at bay. 

  • Keep balances low to avoid additional interest.
  • Pay your bills on time.
  • Manage credit cards responsibly. This maintains a history of your credit report. Those who have no history of credit cards are considered bigger credit risks.
  • Avoid moving around debt. Instead, try to pay it off.
  • Don’t open several new credit cards to increase your available credit. You run the risk of accumulating more debt.

Despite anyone’s diligence in managing their money wisely, sometimes financial hardships happen because of a job loss, medical condition, divorce, or other life events. If you have problems making ends meet, contact your creditors or approved credit counseling agencies for assistance.

Best Way to Consolidate Debt:

There is no single debt solution for your financial problems. There are many approaches you can take to consolidate your debt. Let’s look at a few options.

Ask for Help from Family/Friends:

If you feel that your overall financial status can be handled with some help from a friend or a family member, then it makes sense to do so. However, relationships and money aren’t always the best combination. Therefore, if you do decide to go this route, make sure you have the repayment terms outlined clearly. This way, you can continue to maintain a healthy relationship with your friend or family member who offered to help you.

Using the money you borrow wisely is entirely up to you. The fact that you are not bound by minimum eligibility requirements or other loan terms is a plus. However, your commitment to repay the loan on agreed terms is crucial.

Taking a Personal Loan to Cover the Debt:

Although not always recommended, taking out a personal loan is a potential avenue to take when it comes to credit settlement. This way, you can make a single payment on your loan instead of making multiple credit card payments each month. However, this will only work if you have a good credit standing. If the conditions are favorable, you are likely to get a lower interest on your loan than the interest on your credit accounts. 

Take a Home Equity Loan

This is when you decide to borrow against your home’s equity. The cash you receive can then be used for credit relief or just about anything you want. the cash to pay for just about anything. However, this is a risky way to get out of debt. Although the home equity loans may offer you lower rates, any default on your payments can set alarms off. In turn, the lender legally has the right to start foreclosure on your property. Given the risk, this should be considered a last resort.  

Balance Transfer Credit Card

This is when you open up a new card with a lower interest rate and transfer the balances of high-interest older cards to the new one. Essentially, you are using one card to pay off another. This method is only practical if it helps you save money in the longer run. You have to do thorough research on things such as:

  • The balance transfer fee
  • The interest rate on transferred balances
  • How long is your promotional period
  • What are your annual fees?

This might not be your best way to consolidate debt if you lack financial discipline. Therefore, make sure you choose wisely. 

Cash Out Auto Refinance

This is when you use the equity of your vehicle to obtain a loan from your lenders. The money you cash put can be used to pay off your debt or other expenses. Similar to home equity loans, a missed payment can risk the loss of your vehicle. Therefore, although an option, it is not recommended to go this route as your first choice to consolidate debts.

Retirement Account Loans

Using your retirement funds to pay off your debts is not at all a good idea. However, desperate times may need certain desperate measures. Your retirement funds such as the 401(K) are your future security. Therefore use these funds with extreme caution. These types of loans do not usually require a credit check as long as your plan offers a loan option.

Using a Debt Management Plan with a Certified Credit Counseling Agency

The best way to consolidate debt is to consolidate in a way that avoids taking on additional debt. If you’re facing a rising mound of unsecured debt, the best strategy is to consolidate debt through a credit counseling agency. When you use this method to consolidate bills, you’re not borrowing more money. Instead, your unsecured debt payments are consolidated into one monthly payment to the agency, which in turn pays your creditors each month. Your credit counselor works with your creditors to try to reduce your interest rates and eliminate extra fees, like late charges or over-limit charges.

How Does Debt Consolidation Affect Your Credit?

Debt consolidation and credit are not always harmonious concepts. The work you out on bad debt can lead to some downfall of your credit rating and score. However, the impact it may have depends on how you choose to consolidate your debt.

Out of the many options, the best way to consolidate debt without potential harm to your credit score is debt management. However, you will have the notations on your credit report about the steps you have taken to consolidate debts. While you are on a debt management program you are not allowed to open new credit accounts. This is a means to avoid you from drowning in debt even more.

When you enter a settlement program, typically you must stop paying all your creditors for several months. This puts your accounts into arrears and makes your creditors concerned. When your past due payments are sizable, your debt settlement company will approach your creditors and offer to settle your debt for a lump sum payment that is less than what you owe. This, however, will have an impact on your credit rating due to two main reasons:

  1. You stopped paying your bills for several months
  2. You didn’t pay back your debt in full

The lenders will make a hard credit inquiry on your credit report when you apply for a debt consolidation loan. This usually sparks a negative connotation on your credit rating and score. However, the important thing to remember here is that you can recover your score if you commit to making on-time payments. Also, it will not leave a mark on your credit report. This is true for personal loans and home equity loans as well.

Best Way to Consolidate Debt With ACCC

ACCC is a reputable non-profit credit counseling agency known for its credible help for people in debt. ACCC’s outstanding commitment to customer service is shown with our A+ rating and accreditation through the Better Business Bureau. So, how can ACCC help you consolidate credit card debt without hurting your credit score?

As discussed earlier in this article, one of the things that can be affected is your credit score. Most of the debt relief options can shake your credit ratings from where it currently stands. This is why it is very important that you understand the debt solution that you will choose to solve your credit issues. If you choose the wrong strategy, you could end up wasting your time, money, and effort as you get out of debt.

Admittedly, getting out of a high credit balance is hard to do. It is also not something that you can accomplish overnight. You have to accept that paying off your credit card debt completely will take at least a couple of months to finish. The higher the balance, the longer it will take for you to be completely free of debt.

Speak with a certified counselor at ACCC today to learn your options. Our counselors will take you through a guided approach to educate and explain to you, the best way to consolidate debt for your particular financial situation. Call 800-769-3571 today. 

 

ABOUT AUTHOR / Dilini

Dilini is a Marketing Communications & Programs Associate at ACCC. To anyone, managing finances can be a real challenge! Any tips and tricks to help get through this are great! Dilini will share her experiences, tips, and tricks along the way through the Talking Cents blog. Stay tuned!

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