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NEW YEAR, NEW START WITH DEBT CONSOLIDATION
January 4, 2016
If you’ve resolved to save in 2016, consider starting by consolidating. With
rates continuing to hover near record lows, now is a good time to combine what you currently owe using lower-cost or fixed-rate debt.
The idea is to pay off high-interest credit card balances or other types of debt with a lower-rate loan. Before jumping into an application, check your credit history and score. You can get a free report once a year from each of the three major ratings bureaus, but to get your score, you might have to pay a fee.
Credit scores take into consideration the two most recent years of financial activity, including payment history. If you got stuck borrowing at a lousy interest rate because of a poor credit score years ago, it probably improved provided you consistently made payments on time for a year or two on a car or mortgage. Better credit scores mean better rates.
Debt consolidation tool kit
Consolidation means streamlining existing debt, from car loans to credit card balances, into one monthly payment. Lenders like Central Sunbelt Federal Credit Union can help you figure out the best approach, such as a personal loan or using your home equity. If organizing under one umbrella sounds helpful, consider one of these routes:
1. Balance transfer
Many credit card issuers offer limited-time, 0% interest on balance transfers by new customers in promotions designed to attract business. Shifting high-interest debt over to such a new account, where you can pay off the balance without accumulating more interest, could be a good choice. Some new cards let you transfer a balance fee-free. But most don’t and instead involve an upfront charge, usually a percentage of the amount moved. Also, once the promotion period ends, you’ll pay a higher rate on whatever balance remains.
2. Cash-out mortgage refinancing
Cash-out refinancing gives you a totally new home mortgage, often at a lower interest rate, plus cash drawn from the equity built up in the property to pay off higher-rate debts. Some lenders will let you borrow against car equity, too. Using a vehicle as collateral for a consolidation loan or just to refinance your ride can be a good option. With a loan tied to your home, however, you might be able to deduct the interest costs from your income when tax day rolls around, effectively lowering the rate you pay.
3. Personal loans.
You can also take out a personal loan to pay off multiple debts, or choose a secured loan, in which you borrow using savings as collateral.
Consolidating debt can bring peace of mind while saving interest costs, but there are a few things to remember. Watch out for transaction fees and compare expenses to what you would save on interest. Be particularly mindful of making payments on debt secured by your home, car or savings, as you could lose those assets if you don’t.
Looking for a place to start? Your lender may provide certified counselors who can help you decide which direction best fits your objective of making a fresh start.