Debt consolidation, like all other debt relief strategies, can strongly impact your finances. No matter what you choose, going through the process of paying off your debt will likely affect your financial status.
On the other hand, debt itself is the ultimate enemy. If you don’t take action to pay it off, your credit score will greatly suffer and gaining approval for a new loan will be nearly impossible. You will also need to deal with pesky creditors—and no one wants that. By combining your debts, you are setting yourself up for financial success and future happiness.
If you are thinking about consolidating multiple credit card debts, here are a few things to consider first.
How does debt consolidation affect your credit score?
If you select debt management, your credit score will most likely remain the same. However, your credit report can be affected because it will indicate that you are enrolled in a debt management program. In addition, your credit accounts could be frozen, and you can’t take out a new loan while in the program.
When it comes to debt consolidation loans, the lender will need to make a hard inquiry on your credit score. This will temporarily lower it. On the plus side, your new loan can save you money with a lower interest rate. Making loan payments on time is key to building up your score.
If you choose a balance transfer, the credit pull could slightly dip your credit score. But this is only temporary. Since this form of consolidation lets you enjoy months of low to 0% interest rates, you can pay off your debts without worrying about high finance charges.
All your payments will be credited towards the principal debt – which means you could become debt free a lot sooner. Just be sure to pay off the debt before the special offer expires and interest rates skyrocket.
When it makes sense to consolidate credit card debt
- Organizing your debt payments. The primary effect of consolidating debt is to help you combine multiple credit card accounts into one at a lower rate. Sometimes, all you really need is a debt relief program that can enable you to pay less than you owe.
- Paying off your credit card balances. Consolidation is essentially about restructuring your debt payments. It does not reduce your balance, but it can lower the amount of interest you pay and make your debt easier to manage.
- Having a stable income. Simply having an income is not enough unless you can rely on it. In fact, this may be a requirement for most debt consolidation options. You can’t apply for a new loan or a credit card if you can’t prove stability—the lender wants to know you are a good candidate to pay it back.
- Lacking the time to monitor all your accounts. Another valid reason to consolidate credit card debt is when you are too busy to track all your accounts. Dealing with various lenders and varying interest rates can cause a great deal of stress. It can also lead to missed payments, late fees and penalties.
If you can relate to one or two of these situations, debt consolidation can be the best option to pay off your debt. If you are still unsure, a National Debt Relief debt coach can take you through all your options. The initial consultation is free, and they can guide you in your decision and throughout your journey.
When it doesn’t make sense to consolidate credit card debt
While debt consolidation is a legitimate way to pay off your debt, there are some reasons to eliminate it as an option:
- You fail to fix the reason for your debt. Consolidating debt will not solve the root cause of the problem—impractical spending. It will only treat the symptoms and you could find yourself back at square one or worse. Keep in mind that you are only restructuring your debt–it must still be paid off. You have a long journey ahead before you can consider yourself completely debt free. It is important to determine what led you to debt in the first place and adjust your spending habits accordingly. If it was the result of something beyond your control – like a job loss or an illness – fixing spending habits doesn’t pertain to you.
- You can’t get a lower interest rate. The interest rate should influence your decision to consolidate. A low interest rate will help you save money on payments. If the consolidation loan comes with a higher interest rate than the average of your current debts, don’t do it. At least, not yet. Keep working on finding a better interest rate on your loan.
- Your main concern is lowering monthly payments. There is nothing wrong with wanting to lower your monthly payments – but that depends on what you intend to do with the extra money. Lower payments will stretch your repayment period. And if you don’t put the money to good use, you are better off paying off your loan sooner.
- If you don’t understand the rules of the new loan. Finally, you should not consolidate debt if you don’t understand what it entails. Whether you planned to consolidate through a loan, a balance transfer card or a credit counselor, make sure you know what you are getting yourself into. Knowledge is the best defense against financial mistakes.
Choosing the right debt consolidation loan is half the battle towards becoming debt free. You can find the information you need to make an informed decision at sites like toptenreviews on debt consolidation.