Debt consolidation is a good idea if it lowers your overall interest rates and simplifies your financial situation. Debt consolidation refers to combining multiple debts into one loan or line of credit, with one monthly payment. Borrowers might consolidate their debts by paying them off with a new personal loan, home equity loan or HELOC. Or, they might transfer the balances to a credit card.
So, whether consolidating is a good idea or not ultimately depends on the borrower’s credit history, income and other factors that determine their ability to get a new loan or credit card that will save them money, compared to the current cost of their debts. The simplicity of a single payment can be helpful, too. But it’s not always possible to consolidate fully, and you may not want to if the price tag is too high.
When Debt Consolidation Is a Good Idea
When it gets you lower rates: If you’re able to qualify for a new loan or line of credit with a lower APR than your current creditors are charging, consolidating the debts will reduce the overall cost of what you owe by slowing down the rate at which interest accrues. That in turn will help you pay off what you owe more quickly.
When you’re having trouble managing your payments: If you find yourself with too many individual debts that are hard to keep track of, and you risk missing monthly due dates as a result, consolidating can help simplify your finances.
When the fees aren’t excessive: If you have a credit score of 660+, you should be able to qualify for a personal loan with no origination fee. And some balance transfer credit cards for scores of 700+ have no balance transfer fees. Other loans and cards may charge fees that increase what you owe by 1% to 8%, which might make debt consolidation a bad idea.
When you can get enough funding: Depending on how much you owe and how high your credit score and income are, you might not qualify for a large enough loan or credit limit to accommodate all your existing debts. In that case, you might consider consolidating partially, or you might decide that opening a new account isn’t a good idea.
When you’re not about to make a major financial decision: In the long run, debt consolidation can help you get debt-free more quickly and raise your credit score. But it will cause short-term credit score damage from the hard inquiry required to open a loan or credit card. This could affect your approval odds or the rates you get for things like auto loans or mortgages for up to a year.
In addition, it’s not a good idea to consolidate if doing so tempts you to spend more. For example, if you consolidate multiple credit card balances and free up your credit limits on those cards, you shouldn’t take that as an invitation to rack up a lot of new charges. Instead, if you consolidate debt, you should commit to paying off your balances entirely so you don’t end up in the same situation in the future.
In conclusion, debt consolidation is a good idea when it helps you get organized and obtain better rates. It’s not a good idea when you don’t save any money or when you’re currently in the market for a car or home loan.
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