Recover From Holiday Overspending with Debt Consolidation

The burden of debt can feel inescapable for many. This may hold especially true for those who have overindulged during the holidays. It can be easy to put presents, decorations, or food for a get-together on a credit card and tell yourself you’ll deal with it later. However, “later” eventually comes.

When you finally need to tackle this debt, you may be able to opt for a financial option that could help significantly: debt consolidation.

Discover what you need to know about consolidating your debt and how to determine if it could work for you.  

What is Debt Consolidation?

Debt consolidation refers to the process of combining multiple debts into one new loan, which could result in a lower interest rate, lower payments or other benefits. In addition, you’d have fewer bills to pay each month and won’t have to worry about various due dates.

How Can You Consolidate Your Debt?

There are a handful of ways to consolidate debt. Here are some of the most common:

Debt Consolidation Loan

Some lenders offer loans specifically for debt consolidation. These loans are typically categorized into secured and unsecured loans. Secured loans use an asset, such as your home, as collateral for the loan. Unsecured loans don’t use assets as collateral, can have a higher interest rate and may be more difficult to get.

Personal Loan

Personal loans help you get one lump sum of cash to use for anything you need, including debt consolidation. They typically have lower interest rates than credit cards, so you may want to consider using one to consolidate credit card debt.

Credit Card

A credit card that has a lower interest rate than your other credit card debt could also help you consolidate. Some options offer a 0% annual percentage rate (APR) for a specific amount of time if you transfer your balances to them. Keep in mind that it won’t be kept at 0% forever, so you’ll probably want to pay off your debt as soon as possible.

Home Equity Loan or Home Equity Line of Credit

If you’re a homeowner and have enough equity in your home, you may be able to tap into it with a home equity loan or home equity line of credit (HELOC). The difference in the two lies with how you would acquire the money: a home equity loan would help you get a lump sum at closing, and a HELOC is a credit line that you’d be able to draw from when needed during a set time period. Keep in mind that both of these options act as second mortgages and you’ll have a new monthly payment in addition to your mortgage.

Debt Management Plan

To avoid taking out a loan or applying for a new credit card, you may want to consider a debt management plan that you’d create with a debt relief company or credit counseling agency. This entails closing all your credit card accounts and just paying the agency. However, there are requirements you must meet to be able to take this route.

Pros of Debt Consolidation

There are a handful of reasons why you might want to consolidate your debt. Here are some of the most common:

Save Money with a Lower Interest Rate

When you consolidate your debt, you typically would want to do it with a lower interest rate than what your current loans or credit cards are at. This could help you save on interest in the long run.

Make One Monthly Payment

It can be difficult to stay on top of multiple monthly payments so consolidating your debt into one could make it easier to manage, and you won’t have to worry about missing multiple payments.

Pay Off Debt Faster

The money you save with a lower interest rate could then be put back into paying down your debt, which could help you pay it back faster.

Build Your Credit with On-Time Payments

As long as you pay your bill on time and in full, you could help repair or build your credit since part of your credit score is made up of your credit utilization ratio.

Cons of Debt Consolidation

Debt consolidation also comes with risks that you’ll need to consider before you decide to move forward with this option.

It Doesn’t Solve the Root Problem

Consolidating your debt doesn’t help if you have a habit of overspending, and you may end up owing even more. Creating a budget, understanding where you can cut back on spending and keeping an emergency fund could all help build better financial habits, so you don’t end up in debt again.

Pay Upfront Costs

There are some debt consolidation loans that come with fees that you’ll need to pay upfront. Depending on how much they are, you’ll need to assess when and if you’ll hit your breakeven point and if the cost of debt consolidation would make sense for your situation.

Missed Payments Can Make Debt Worse

You may owe late fees if you miss a payment, which can add to your debt and potentially lower your credit score. To help ensure you don’t miss any payments, you may want to consider enrolling in your lender’s automatic payment option if they have one.

You May Not Qualify for a Lower Rate

Depending on various financial factors, like your credit score, you may end up getting a higher interest rate than expected since lenders could see you as more of a risk.

Can Debt Consolidation Work for You?

On average, Americans spend around $1,000 on holiday gifts every year. While it’s fulfilling to see your loved ones happy, overspending and overwhelming debt can result in life-altering events. Debt consolidation could be a great way to help you better manage your payments, but make sure you also assess the risks involved before you take the plunge.

This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information on financial planning or investment advice, consult a registered investment advisor or financial planner.