Anyone carrying a lot of credit card debt will tell you getting into it can be a lot easier than getting out. Credit card debt just has a way of creeping up on you, especially if you can only afford to make minimum monthly payments. Fortunately, one of the least costly ways to get rid of multiple credit card obligations is debt consolidation. However, things have to line up just right for it to work, which raises the question: “When should I use debt consolidation?”
Let’s take a look.
What Is Debt Consolidation?
Said simply, debt consolidation involves taking out loan and using it to pay off your outstanding debt (or as much of it as possible). This rolls all of those debts into one, which can make paying them off easier.
When Does Debt Consolidation Make Sense?
As we said above, though, debt consolidation isn’t always right for everyone. Things have to line up in a certain way to make it make sense. Debt consolidation is likely to be a good idea when all four of the following are true for you.
1. You Have a Lot of Monthly Debts
Consolidation can make sense when you have a number of major debt-related bills that need to be paid each month. This can be credit card debt, medical debt, certain types of student loan debt and any type of high-interest personal loan debt. You’ll be combining the payments you were making on all of those different accounts and applying it to a single one. This can help you pay off a consolidation loan much sooner than multiple credit cards.
2. Those Debts Have High Interest Rates
The interest rates associated with credit card debt can make it difficult to repay. Annual percentage rates of 20 percent or higher are quite common with credit card debt. You could be paying for decades when facing interest rates that high on three or four credit cards. This is especially true if you can only afford to make minimum payments on each one. Consolidating those debts at a lower interest rate will save you money each month.
3. You Have a Good Credit Score
You’ll need a good credit score to get a favorable consolidation loan interest rate. Yes, there are lenders who will write a consolidation loan if your score is less than ideal. However, you’ll be looking at a higher interest rate than you would if your score was in the good-to-excellent range. This could cancel out one of the key benefits of consolidation.
4. You Understand How Your Debt Got Out of Hand
Consolidating debt doesn’t pay it off. You’ll still owe the money. Paying it back will just be easier to manage. Meanwhile, you’ll find yourself holding a stack of credit cards with no balances. This can be a tempting situation, which is why it’s important to get in touch with why you ended up with so much debt in the first place—and take steps to make sure it doesn’t happen again. Otherwise, you could end up with a bunch of new debt, while paying off the consolidation loan too.
In Summary
Debt consolidation loan interest rates can help you clear up a lot of credit card debt more easily. It also works for medical debt, student loan debt and personal loan debt. The key is to have a good credit score so you can get the lowest possible consolidation loan interest rate. It’s also important to have a plan that will keep you out of debt — at least until you pay off the consolidation loan. That way you won’t create a deeper hole to dig your way out of.
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