Before you decide to apply for a debt consolidation loan, this checklist will help you prepare for all of the surprises along the way. The goal of debt consolidation is lowering interest rate payments and eliminating minimum payments on credit cards. Try to improve your credit score before applying for a debt consolidation loan. It will save you even money in interest fees with the main purpose of debt consolidation is to lower your interest fees. If you have bad credit and start applying for debt consolidation before improving your credit score, there may be no advantage to you. 

Importance of a Credit Score

This chart was designed to break down interest by credit score. A personal loan will get the debt paid off and clear your credit cards. This will also improve your credit score when you bring your credit card balance to 0 every month.

36 Month Term Personal Loan

Interest Rate Loan Amount Credit Score Monthly Payment Loan Interest Total Repayment
36% $5,000 550-600 $180.66 $5,839.89 $10,839.89
22% $5,000 600-650 $138.09 $3,285.67 $8,285.67
9% $5,000 650-700 $103.79 $1,227.51 $6,227.51
6% $5,000 700+ $96.66 $799.84 $5,799.84

  1. Poor spending habits are the greatest risks of debt consolidation. If you pay off all of your debt and continue spending at the same level, you may not have a way to pay off this debt again and end in bankruptcy

  2. If you are in trouble now with bad credit and you cannot make your payments, consider contacting your credit card company now and asking about their hardship program. Find out your payment options before taking a step towards debt relief

  3. Debt consolidation may not be an option for you if you have a bad credit and do not have a co-signer available or collateral/security from a home equity loan or home equity line of credit. Debt settlement, debt relief may be an option

  4. Auto refinance is another option with debt consolidation. Be careful with this option, as you do not want a vehicle with a loan higher than the vehicle worth

  5. Consolidating or refinancing student loans may be an option, but carefully consider the benefits of federally backed student loans before taking this step

  6. If you are concerned with your spending habits, consider credit counseling or debt management services before applying for a debt consolidation loan

  7. A co-signer may be an option if you cannot qualify for a debt consolidation loan. A co-signer will offer you lower interest rates and a higher loan amount

  8. Make a list of all of your debt. You need to know your total debt amount so you know the size of debt consolidation loan you plan on applying for and eventually to see if you can qualify for that size of the loan secured or unsecured

  9. If you own your home, applying for a home equity loan or a home equity line of credit will provide the lowest interest rate. There will be fees including appraisal and legal costs to set up equity access. These processing fees may be as high as your closing costs when you purchased your home. Depending on how much money you require, the fees may be higher than the interest costs of just applying for a personal loan or using a 0% interest credit card

  10. A home equity line of credit (HELOC) has long-term benefits beyond paying off your debt consolidation loan. This revolving line can be used for approximately 10 years before having to start repaying the loan. Interest costs will be as long as 2-3% and interest only during the draw period

  11. A HELOC reverts into a loan after the 10 to 20 year draw period. The HELOC will become a loan with interest and principal for the next 20-30 years after the draw period, check with your lender to calculate this future interest cost. A short-term loan may be a better option

  12. Mortgage rates are increasing with two rates increases announced in 2018. A fixed rate may provide lower interest costs while the economy heats up

  13. A personal loan or installment loan with set payments over a term will improve your credit score in comparison to a credit card. The term loan provides a set amount every month and will help you budget. A credit card is considered a revolving line of credit line because you can use the available amount of credit at any time

  14. Do you have a bonus, commission or tax return coming soon? This is a great way to pay down high-interest debt

Credit Cards

Ask all of your existing credit card providers for a lower interest rate. The credit card industry is very competitive, so take advantage of that and request a lower interest rate. If they are unwilling to deal, your existing provider may offer rates on 0% interest on balance transfers that can save you a lot of money on interest payment and allow you to pay off debt faster by applying larger payments to debt.

  1. Holding revolving credit card debt and only making a minimum payment is the most common type of debt that is consolidated. A debt consolidation loan will not eliminate the debt immediately, it will start to lower the debt month by month at a lower interest rateIf your debt can be managed with a 0% interest balance transfer credit card option, the credit card providers are offering 15 to 21 month 0% interest programs and this is a great way to deal with high interest very quickly Ask your lender for a quote on an unsecured personal loan. Find out what interest rate they will offer you to consolidate

  2. If you miss a payment with your credit card provider, your interest rates may automatically increase to the credit card companies highest interest levels. If you see a large increase in interest costs, contact your provider. You may need to change the type of credit card you are using to correct this issue. Either way, you will need to ask the credit card company how to lower your interest costs after missing a payment
  3. 21 Month Interest-Free Balance Transfer 0% Credit Card Get 0% Intro APR for 21 Months With Citi® Diamond Preferred® Card. If you are considering debt consolidation, a 21 month 0% balance transfer credit card is an excellent way to clear high-interest expense rather then taking out a personal loan and paying interest now. The Citi® Diamond Preferred® Card are available for good and excellent credit. This credit card option provides an excellent way to reduce interest expense and pay off the debt over the 21-month term. If you still have debt remaining after 21 months, apply for a debt consolidation personal loan

  4. 18 Month Interest-Free Balance Transfer 0% Credit Card Earn Up to 5% Cash Back With The Discover it® Balance Transfer Card. If you have fair credit and considering debt consolidation, an 18 month 0% balance transfer credit card is an excellent way to clear high-interest expense instead of taking out a personal loan and paying interest now. You will also receive 0% interest for 6 months on purchases

  5. Cut up any credit cards that you are not using. If you have applied for credit cards at stores to get a better deal and never used the card, contact the provider and get rid of it. Credit scoring is based on available credit utilization, if you have this type of card active, it is affecting your credit score. Remove it and it will improve your credit score very quickly. It is a balance between having too much available credit and what you actually require. With the national average of 2.3 credit cards per person, what do you really need?

  6. If you have old credit cards that you are concerned about using and you just do not trust yourself, cut up the card but do not cancel them. Older credit cards help your credit score in regards to your credit history as well as your credit utilization when cards sit with a zero balance. If you do need to book a trip or have an emergency, you can still use the credit card. By cutting up the card removes the instant usage

  1. Understanding FICO Scores - Understanding FICO Scores acquired July 2018
  2. How to get a free copy of your credit report - How to get a free copy of your credit report acquired July 2018
  3. 36% Interest Rate Cap - 36% Interest Rate Cap nclc acquired June 2018
  4. cfpb - Consumer Financial Protection Bureau - cfpb - Student Loans