But what if you’re not struggling to make monthly payments and have reasonably good credit? Is debt consolidation even worth thinking about?
At the very least, examining and managing your debt may help you save money (you like money, don’t you?), and at best it could forestall a creeping credit slide that leads to late payments, a damaged credit rating, or worse. Given the do-it-yourself craze that seems to have swept the land, with people making everything from marshmallows to homes on their own, there’s no reason you can’t take on debt consolidation yourself.
First, you’ll need to inventory all your debt. Sites like AnnualCreditReport.com can provide you with a free credit report to get started. Once you’ve listed all your debt sources, including interest rates, payments, and balances, you can develop a strategy for consolidation.
One approach is to divide your debt into groups, like good, bad, and neutral. “Good” debt might be such things as mortgages, business loans, and student loans (provided they don’t have high or variable rates). These have the potential to help your income down the road and are often tax deductible, so they have the lowest priority.
“Neutral” might include vehicle loans or fixed-rate personal loans. They don’t necessarily hurt you in terms of credit or finances, but they’re not necessarily doing you any favors either.
The debt you’ll want to concentrate on first is the “bad” stuff, which usually means they have variable or high rates, like credit cards or payday loans. Start with those with the highest rates, transferring them to accounts with lower rates. You might be tempted to transfer some of these to a new credit card with an attractive low teaser rate, but think twice about this. Will you be able to pay off the balance before the “real” rate kicks in? How high will that rate be? Also, you’ll effectively be adding more capacity for debt to your credit situation — is that really what you need?
If you have good credit, another option might be to call your card issuer and politely try to negotiate a new rate. Even if you shave off just 1 percent, that represents money you’ll be saving later. Transferring to a fixed-rate personal loan from a credit union or bank is another option.
If you’re carrying student loans, see where those rank on your hit list in terms of rates. Remember that federal student loans typically have lower rates, as well as deferral or forbearance options, so those will likely take a lower priority. That said, the federal government does have a site where applicants can attempt to consolidate their federal student loans and possibly lower their monthly payments.
Consolidating your high-interest loans into more reasonable ones — and strategically paying off the most expensive debt first — can reap dividends by saving you money and protecting your good credit rating in the future. By going DIY now, you can prevent your credit from being DOA later.