The cons of debt consolidation are that it's hard to get a worthwhile rate with below-average credit, not all debts are eligible, and there is a possibility of fees. There is also the danger of debt settlement services posing as debt consolidation, which can lead to significant credit-score damage.
The pros of debt consolidation outweigh the cons, but it's important to consider both sides when you're thinking about consolidating.
Cons of Debt Consolidation
Hard to qualify with bad credit
If you have bad credit, you can still get a loan or credit card to consolidate your debt, but it likely won't have a better interest rate than your existing debts.
Personal loans without origination fees also require a fair credit score (usually 660+). For a home equity loan, a home equity line of credit or a good balance transfer credit card, you'll need a score of 700 or higher.
Not all debts are eligible
Not all consolidation options support all types of debt. For example, credit card issuers often limit the types of debt that you can move to a credit card through a balance transfer.
Applying for a new loan or a balance transfer credit card triggers a hard inquiry. This will temporarily decrease your credit score. After a few months of on-time payments, it'll get back to where it was.
Possibility of fees
You may need to pay fees in order to consolidate debt. Some personal loans have origination fees of 1% - 8% of the loan amount, and some credit cards have balance transfer fees of 3% - 5% of the transferred amount. Keep an eye out for these fees when comparing your options.
Settlement posing as consolidation
Debt settlement programs often advertise themselves as debt consolidation programs. With debt settlement programs, you'll still make monthly payments to the company that's "helping" you, but it will withhold the money from your creditors until they reach a settlement to pay only a portion of what you owe and have the rest forgiven.
Even though this seems like a good thing, it causes a lot of credit score damage by forcing you to miss payments and potentially default on what you owe. The company will charge you fees of 15% to 20% of the original debt, too.
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