Do you recommend credit consolidation?
- July 29, 2019
- by Saundra Davis
Do you recommend credit consolidation to improve scores and decrease debt?
Submitted by Natasha P.
There are two parts to this question, so let’s dig into them separately.
Improving Your Credit Score
Whenever a financial institution pulls your credit with the purpose of offering you a loan, your score may be affected. Closing a credit line, especially a well-established line, can also impact your score.
If you are consolidating a lot of credit cards or other debt into one or a couple of lines it can become more manageable and easier to not miss a payment, possibly improving your score. However, you could end up with a higher interest rate and the terms of consolidation often require you to close the other accounts. You can see that there are several things to consider.
Decreasing Your Debt
As for consolidating debt to decrease debt, consolidation doesn’t make the amount you owe disappear. It may make it more manageable to pay off depending on your budget, interest rate, and what your monthly payment would be. I’d first take a look at your spending habits, create a budget, and see where you could possibly bring in more money to help pay off the debt. If the habits that got you into racking up this debt are still in place, you’d be hard-pressed to see much change with or without debt consolidation.
If you do decide to consolidate debt, you’ll want to take three factors into consideration:
- What is your primary objective? Do you want to lower your interest rates overall, lower your monthly payments, or minimize the number of open accounts? Of course, the lower the rate, the less money you will pay in interest over the life of the loan. Most loans with collateral (ex. car, house, or savings account) will have a lower interest rate than unsecured loans.
- How much can you pay per month? The more you can afford, the quicker the loan is paid, and less interest will accrue.
- What is your time frame to get out of debt? By reorganizing debt and changing the type of debt and how much you owe per month, you can free up funds in your budget to pay off all of your debts quicker and maybe even jumpstart your savings.
Every situation is unique and debt consolidation is not always the right choice. Credit unions are my favorite resource for consolidation loans. By evaluating your current spending habits and considering the three questions mentioned above, you can come to the decision that will be best for you.