Households with credit card debt pay an average of $1,300 a year in interest.
It’s frustrating to watch all those dollars get sucked up with no benefit, and many people find it hard to climb out of debt, even if they can make consistent payments.
If you find yourself in this position, it may be worth consolidating the balance on your credit cards in order to improve your financial position.
How does debt consolidation work?
A debt consolidation loan can be a good way to manage debt. By taking out a single loan to pay off multiple debts, you can significantly lower your interest rate. It will also streamline all of your accounts into a single monthly payment, leaving less room for human error in the management of your money.
You can pay off credit cards with a personal loan, a home equity loan or line of credit, or even a credit card balance transfer, which sometimes offer interest rates as low as 0% for certain periods of time.
Personal loans have becoming increasingly affordable and easier to get, and can cut your interest rates well under half of what the credit card companies charge. A home equity loan for example can have very low interest rates, but, of course you first have to own a home, and, you’ll be putting your home at risk if you aren’t able to pay.
How debt consolidation affects credit score
If you get a debt consolidation loan, your credit score will most likely increase.
Carrying balances near the maximum or using a high percentage of your available credit, even if it’s spread out through several different cards, negatively affects your credit score. Shifting the burden to a single loan will be looked at more favorably by the various credit score companies.
How lenders perceive debt management plans
There are for-profit and not-for-profit companies that will help to set you up on a debt management plan. These can be helpful, but you should make sure you do your research, as some of these companies aren’t looking out for your best interests.
Is it right for you?
Debt consolidation isn’t the right solution for everyone. For it to be a viable option, the majority of your balances should be in unsecured debt like charge cards, credit cards and personal loans. Other types of debts like tax debt or unpaid child support can’t be folded into a debt management plan.
You should be confident that you can consistently make the payment for years to come. Defaulting on a consolidation loan could leave you with bigger problems than you started with.
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