Is your personal or business debt rising and getting out of hand? Consumer debt is growing to worrisome levels. For example, “The average credit card debt per U.S. household was $8,398 in June 2019. That’s $1.07 trillion in total credit card debt divided by 128 million U.S. households.”
Like many people, especially if you own a business, you’ve probably considered ways to improve your personal and/or business credit. If so, then researching how to consolidate debt is an important part of your financial health and entrepreneurship journey.
Many business owners choose to consolidate their debt into one monthly payment. This approach can often lessen the stress of debt and decrease the likelihood of falling behind on multiple payments (since paying multiple creditors at different times of the month can be overwhelming). The logic behind this approach is that one monthly payment is much less complicated than multiple credit card and loan payments.
Depending on your financial situation, this approach may not work for all of your creditors, so it’s important to understand your financial situation.
Is debt consolidation the right choice for your small business?
Consolidating the money you owe into one debt instrument helps you manage your everyday bills with more ease. Meanwhile, combining debt may provide you better lending terms and interest rates.
For example, if you purchased a lot of office furniture to outfit your new space, you may have done so from more than one retailer. Consolidating that business debt with one creditor will allow you to make one easy payment for your small business debt.
Meanwhile, if you have a poor credit score, it’s unlikely that a line of credit is available from your local bank. So it pays to research debt consolidation options for low credit score ratings. Debt, or the negative credit ratings often associated with it, doesn’t disappear overnight. However, you can improve your credit score over time.
Once you’re ready to consolidate your debt, here are a few quick and simple steps you can take:
1. Research your personal and business credit ratings
Research and inquire on the status of your credit score from one of the reputable credit bureaus. There are three major credit agencies in the United States: Equifax, Experian, and TransUnion.
Meanwhile, there are several business credit reporting agencies track small business credit scores. Three of the major ones are Dun & Bradstreet, Equifax Business and Experian Business. If you’ve taken the time to build business credit, outside of your personal credit history, you’ll be able to track it with one of the agencies mentioned above.
2. Calculate the total debt owed (personal and business)
To assess if debt consolidation is the best strategy for you, gather all of your bills and calculate the total owed alongside the interest rate for each creditor. If you’re purposely ignoring your debt, you may surmise that you have more debt than you can handle and you’re simply scared to face up to it. Facing the real amount of debt can be scary, but it’s a significant step to greater financial freedom.
If your debt is past due it could be marked for a charge-off. A charge-off is a debt that your creditor has given up trying to collect from you after you’ve missed payments for several months. This will reflect poorly on your credit rating if it goes unaddressed. In this situation, you may e able to negotiate with your creditor and reduce the total balance owed.
3. Research balance transfer options
A terrific option to consolidate any debt owed is to transfer the balance of one credit card to another with more favorable terms and lower interest rates. The balance transfer fee is usually 3% to 5% of the amount you want to transfer.
For example, if your balance is $20,000, a 3% fee would cost you $600. However, this could be a small price to pay in the short run and result in more long-term savings depending on the terms of your current and prospective card holder.
A few cards have no balance transfer fees. Use a free online calculator to calculate the amount of interest you’ll save by transferring existing credit card and loan balances to a lower rate card.
4. Consider a home equity loan to restructure your debt
Do you own your home? if so, you may be able to tap into its equity and restructure your debt. This is a good alternative if you have a low credit score. This approach will increase the length of your loan and lower the monthly payment.
5. Tap into your retirement account
Did you know that you can use your retirement account to take out a loan and pay-off debt? However, it’s important to understand the pitfalls of early withdrawals. However, it’s wise to consult a financial adviser to ensure you’re setting yourself up for long-term comfort and stability and not digging too deep into your nest egg.
Good or bad credit? Debt consolidation is a smart move
Debt consolidation is a smart move for those with good and poor credit. Research the options that work best for you and consult a financial advisor before you consolidate. Not only can you unburden yourself from the stress of dealing with multiple creditors, but you can also benefit from the peace of mind that you’re on your way to a better financial plan that will improve your bottom line.
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