Debt Consolidation When It’s Worth It (And When It’s Not)
If you’re stressed out and juggling multiple credit cards and loans then you’ve probably thought about debt consolidation and wondered “is it right for me?”
Millions of Americans turn to debt consolidation as a way to regain control and put a stop to the debt cycle. But with different consolidation options and alternatives available, it can be tough to know if it’s the right move.
Here is a quick overview of when you should and shouldn’t consider consolidation for your debt.
What Is Debt Consolidation?
Debt consolidation combines multiple debts into one manageable monthly payment that is typically more affordable for the borrower.
From there debt consolidation options diverge and the structure and benefits vary.
Types of Debt Consolidation
Consolidation Loans, Balance Transfer Card and Home Equity Options
These are traditional options that consolidate the debt by rolling it into a new loan or credit card with a more favorable interest rate or term. Qualifying for new terms can help you pay less overall, speed up repayment or lower your monthly payment.
Worth it when:
- You have a steady income
- Your monthly payments are already manageable but you want to save money
- You have excellent credit and need to maintain it
- You’re likely to qualify for better terms
It’s less ideal when you’re experiencing a more severe financial hardship, you’re already behind on monthly payments or have poor credit. With traditional debt consolidation, if you don’t qualify for better terms it may not be the right option for you.
Other Debt Consolidation Options
Other consolidation options, especially those geared toward folks with financial hardships will also combine eligible debts into one manageable monthly payments, but have more options for fixed incomes and poor credit.
You still need a predictable income to be successful, but your credit history won’t block you from qualifying.
Debt consolidation options can be a great fit for folks who are struggling and want to stop the never ending cycle of debt but simply don’t qualify for more traditional methods.
Worth it when:
- Getting out of debt is your top priority
- You have steady income
- You don’t qualify for traditional consolidation options
It’s less ideal when these financial scenarios apply …
If you have really good credit and a high income (relative to your debt) you’d probably qualify for more traditional methods.
If you have no income at all, you might need something more extreme like bankruptcy.
If you need to leverage your credit score to take on additional debt like a mortgage — caution is advised. In this instance, you’ll need to be honest with yourself about what you can afford. If you’re overwhelmed by debt does it make sense to take on more of it?
Alternatives to Debt Consolidation Options and Loans
Some Debt Solutions May Temporarily Affect Your Credit
Keep in mind, some options can temporarily impact your credit score. But over time, the real benefits — manageable payments, less debt and progress toward being debt-free — far outweigh the short-term impact.
Once you regain control of your finances, rebuilding your credit can naturally follow.
What’s More Important: Getting Out of Debt or Taking on More Credit?
Before stressing about your score, think about your main goal.
If you’re preparing for a big purchase like a mortgage, credit matters most. But if high-interest debt is weighing you down, tackling that first might be a more urgent priority.
Ready to Make a Change for Your Debt?
A Debt Consolidation specialist can help you review your options and find the one that’s the best fit.