The Family Guide to Credit Consolidation

Trying to figure out how best to repay debt can be confusing. Debt consolidation can be a viable option if you understand the financial strategy and how it can affect your family.

With that in mind, here’s a family credit consolidation guide.


What Is Debt Consolidation?

The practice of consolidating credit entails rolling multiple debts together so that you make a single monthly payment of the same amount each time, instead of multiple payments of various amounts, depending on your debt load.

Ideally, the amount of interest you pay on the consolidated loan will be less than the average amount you pay on all your debts (otherwise, a consolidation loan makes no sense). This way, you can save money and erase your debts faster.

This Is How It Works

Say you have balances on three credit cards with a blended interest rate of roughly 20.1 percent.  The cards have credit utilization rates – your outstanding balance divided by your credit limit – of 80, 100, and 50 percent. Generally, an ideal credit utilization ratio is less than 30 percent

If you consolidated those debts, you’d have only one monthly payment instead of three. Not only is that more convenient it’s easier to keep track of. You also will likely be able to get a loan with a lower interest rate than the blended 20.1 percent. What’s more, combining them into one debt would lower your credit utilization ratio, which could improve your credit score over time.

Ways To Consolidate

Family credit consolidation can be accomplished in several ways. One primary method is through a balance-transfer credit card. Some credit card companies will let you transfer balances to another credit card that has better terms. Keep in mind though, you will encounter balance transfer fees. It’s important to take those into consideration when evaluating the potential benefits of this approach. 

A debt consolidation loan is another strategy. These unsecured personal loans can be obtained from a credit union, bank, or online lender. Such loans typically have relatively low fixed interest rates, but you’ll need to make payments on time to eliminate the principal in just a few years. You’ll need a good credit score to get favorable terms, but this can be a beneficial strategy.

Using the equity in your home is another way to consolidate. You can either use a home equity loan, which lets you borrow a sum at a fixed interest rate, or a revolving home equity line of credit, that usually has variable interest rates.

Either way, you’re turning your unsecured debt into secured debt, using your house as collateral. The risk here is that if you don’t make your payments you could lose your home.

Then you’ve got the 401(k) loan option. Such plans typically permit you to borrow against your retirement savings. The advantages are low interest rates and no credit score hit since you’re borrowing from your future self. Be aware, however, that such loans must be repaid within five years. If you lose your job, though, repayment is due in just 60 days. If you can’t handle repayment, you’ll have to pay a penalty plus taxes on the balance.

The other major debt consolidation strategy – debt management – involves working with a credit counseling agency. This tack is usually best suited for those whose credit scores are too low for other types of debt consolidation. 

Bottom Line

Debt consolidation is a formidable tool that can help set you on a beneficial financial path – IF you know the ins and outs and choose your strategy wisely.  With this family guide to credit consolidation, you’re well on your way to a choice that’s best for you.