Is Debt Consolidation Right for You? Here are Five of the Most Common Questions We’re Asked About Debt Consolidation.
- What is debt consolidation? Debt consolidation is a strategy to combine outstanding loan, credit card, retail debt or other debt into one monthly payment. The goal would be to consolidate higher interest debt into one lower, fixed-rate interest loan or take advantage of a low-interest credit card balance transfer. Your focus for debt consolidation should be to lower the interest rate and combine multiple payments into one, easier to manage monthly payment. This may make it easier to pay off the debt faster.
- Can debt consolidation save me money? While debt consolidation is not guaranteed to save you money, it often does, and that is the point of consolidating. If you have a lot of debt, you may have to take out a pretty hefty loan to pay everything off. As we mentioned above, your goal is to find a much lower interest rate than you are currently paying on all of your existing debt. This should result in less interest paid every month and more focus on paying down the total you owe. Debt consolidation won’t save you money if you consolidate into a higher interest loan and continue to rack up debt. That’s just a recipe for financial disaster!
- Is a home equity loan a good option for debt consolidation? A home equity loan can be a good option if you have enough equity in your home and understand that defaulting on the loan can result in your losing your home. Home equity loans typically provide pretty low interest rates. You would just need to be sure you will be able to make your loan payments on time. Get an idea of various loan rates on the Choice One website.
- Does debt consolidation hurt my credit score? Debt consolidation doesn’t hurt your credit rating if you make your payments on time every month. You’re paying off other high balances, so your really not adding to the amount of debt you already had. You may see a slight drop in your rating when you initially borrow the funds to consolidate the debt, but once you start paying off all of the individual accounts and start making your monthly loan payments, you should see your score increase. Making all of your payments on time and not charging up more debt are both key.
- When is debt consolidation a good idea? When your credit is good enough for you to qualify for a low-interest loan or a zero percent or low balance transfer offer, debt consolidation may be a good option for you. Also, when you know that you have the funds in your budget to make all of your consolidation loan payments on time and get your debt paid off quickly. Read the fine print when considering a credit card balance transfer offer though. The zero percent or low percent is usually only for a limited time, and then it will revert to the regular rate of the credit card. It’s important that you understand how long you will be eligible for a special rate and how long it will take you to pay off the debt. Another important factor when considering a debt consolidation loan, you need to discipline yourself to not running up additional debt. While you’re focusing on paying off your debt, don’t continue to charge on your credit cards or make large purchases, which will only get you further in debt. You will just be digging yourself into a deeper hole that will be even harder to climb out of. If you don’t feel you have the discipline to control your spending while paying off your balance, then debt consolidation may not be the answer for you.
In conclusion, consolidating multiple debt payments into one, lower interest loan may help you stay on the right track in making your monthly payment on time and chipping away at that debt. While debt consolidation isn’t the answer for everyone, it may be worth considering if you feel you have the discipline to control your spending and make your payments on time. If you have questions about consolidating your high-interest debt, feel free to contact a Choice One Community Credit Union loan representative at 800-610-2788. Learn more about our various loan products easily right online.