What Is Debt Consolidation And How Does It Work? | Smart Change: Personal Finance

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For example, suppose you have four outstanding credit cards with the following balances:

  • Credit card A: $ 3,400
  • Credit card B: $ 2,600
  • Credit card C: $ 6,000
  • Credit card D: $ 4,000

In this example, you have a total of $ 16,000 in outstanding credit card debt, split across four cards and with annual percentages (APRs) between 16% and 25%. If your creditworthiness has improved since you applied for your existing cards, you can qualify for a credit transfer card with an introductory APR of 0% that allows you to pay off these cards interest-free for a period of time. Alternatively, you can choose to take out a debt consolidation loan with an APR of 8% – not 0%, but lower than your current interest rates.

Types of Debt Consolidation

Since debt consolidation can be a way to manage multiple types of debt, there are several types of debt consolidation. Here are the different types of debt consolidation to meet the needs of each borrower:

Debt Consolidation Loan

Debt consolidation loans are a type of personal loan that can be used to lower a borrower’s interest rate, streamline payments, and otherwise improve credit terms. These personal loans are usually available through traditional banks and credit unions, but there are a number of online lenders who also specialize in debt consolidation loans.

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