If you’re having a whale of a time keeping up with your credit card payments, you need to take serious action to get you back on track. You’ve heard something about debt consolidation but aren’t sure what it entails. So, is consolidated credit a good idea? Let’s take a look.
The Situation
It’s becoming increasingly common for people to seek relief from multiple debt payments and costly interest rates. In fact, 38% of those with credit card debt have taken out a debt consolidation loan, according to CNBC.
However, before pursuing this financial strategy, be sure to have your spending under control. It makes no sense – or cents – to get out of a hole if you’re destined to climb back down.
What is Debt Consolidation?
Again: is consolidated credit a good idea? Well, we first need to define the approach. Basically, consolidation entails streamlining debt payment by rolling multiple unsecured debts into one, ideally with a lower interest rate than what you’re now paying. With debt consolidation, you only have a single, fixed payment to concern yourself with each month.
Does Debt Consolidation Hurt Your Credit?
Because you’re opening a new line of credit and shifting a big balance to it, your credit score will take a temporary hit. How long will your credit report show your new consolidated account as well as your old balances? It depends on how long it takes for your card issuers or other creditors to update the credit bureaus.
Your credit will also drop a few points temporarily when the lender conducts a hard credit check to assess your eligibility and risk.
Is Debt Consolidation the Same as Debt Settlement?
Nope, not the same. Debt settlement calls for you to see whether your creditors will accept a partial payment to “settle” your debt. This approach often works because creditors know that if you file bankruptcy, they get nada. To further motivate creditors, you’ll likely be asked to stop paying your creditors and instead deposit money each month into an escrow-like account. If the creditors agree to settle, those funds will be used to pay said creditors.
When Should You Consider Debt Consolidation?
You should probably consider debt consolidation if you are serious about erasing debt, have your spending under control, have a balance north of $10,000, or want to lower your monthly payments or interest rate. You may also wish to consider the strategy if collection agencies are at your door, and you’ve determined that consolidating debt will save you money.
Different Ways to Consolidate Debt
Common ways to consolidate debt include:
- Balance transfer. This is when you shift high-interest credit card debt onto a balance transfer card, which usually offers 0% interest for a promotional period – typically a year to 18 months. You just need to be sure you can pay off the balances before the interest rate shoots back up.
- Debt consolidation loan. Here, you take out a personal loan to that carries a lower interest rate than what you’re paying now to cover all your balances. You then make a single payment each month on the new loan.
- Home equity line of credit. If you own your home, you can take out a loan against equity you have in it. Tread carefully, however, because these low-interest loans require collateral in the form of your crib. Default on your loan and your house is at risk of foreclosure.
Is consolidated credit a good idea? As you can now see, it depends on your situation and whether your spending has been reined in. It is a proven strategy, however. Get going on your finances today.