Debt consolidation becomes more attractive – InsuranceNewsNet
There’s never a good time to have a lot of personal debt, but now has to be one of the worst times.
Americans are increasingly relying on credit cards to make everyday purchases and pay bills. Credit card balances jumped 13% last quarter compared to the same quarter in 2021, the biggest jump in more than 20 years, according to data from the New York Federal Reserve.
Since March is the
High interest rates make credit card and debt consolidation programs attractive to consumers, he said
These programs often advertise lower interest rates to combine all of your debt and pay it off in one loan, but there’s more beneath the surface.
What are the disadvantages of consolidation?
Many lenders can offer borrowers low interest rates on debt consolidation loans because they have longer terms. It could end up costing you more than not going down the debt consolidation route.
Debt consolidation companies may also charge additional fees, e.g. A one-time lending fee, for example, and force you to pay a higher interest rate if you don’t opt for automatic payment.
“Those added costs of interest and fees over time could affect your ability to build your safety net or save for a safe retirement,” McClary said. “So you don’t want to sacrifice your future for the present.”
Above all, debt consolidation is not a “silver bullet solution,” he said
While debt consolidation can ease some of your headaches now, you’ll only dig yourself a deeper hole if you don’t change any of the financial habits that caused you to rack up debt in the first place, Mangla said.
She recommends contacting a nonprofit credit counseling agency like NFCC to discuss whether debt consolidation makes sense. They can also help you set up a debt management plan where you make a monthly lump sum payment to the nonprofit that makes payments to your creditors on your behalf. In some cases, they can also negotiate lower fees and interest rates.
You can also contact your creditors and look for a lower interest rate or terms that make paying off debt easier.
The savings you receive can help you avoid the need for a debt consolidation loan.
Is Debt Consolidation Bad for Your Credit?
Debt consolidation does not inherently harm your credit score.
However, when you apply for a debt consolidation loan (or any other type of loan), the lender must submit a “hard” loan request, which is noted on your credit report. If you have good credit, the request should have a negligible impact on your score. However, if you have bad credit or have had several tough credit inquiries recently, your credit score may drop by up to 10 points temporarily.
It is important to research prices before applying. McClary recommends comparing prices and terms on sites like
If you don’t make your minimum payment on time, your credit score will drop.
Is it a good idea? Who is eligible?
The answer largely depends on a person’s creditworthiness.
McClary said that debt consolidation ads would often say, “‘You could get an interest rate as low as x,’ but that rate may only be available to people with the best credit ratings.”
Generally, you need a FICO credit score that is in the mid-600s according to FICO
Some lenders don’t specify a minimum credit score, but if you have a credit score below 600, you’re less likely to be approved. Or if you are approved, the rate the lender is offering you is higher than the advertised rate, and they may not be offering as much credit as you need.
On the other hand, if your FICO credit score is 670 or higher, you should consider applying for a signature loan — an unsecured personal loan that likely has a better interest rate, McClary said.
What does debt consolidation mean?
Debt consolidation means taking out a new loan to pay off multiple types of debt. It could also be used to pay off debts you have incurred with multiple credit cards, also known as credit consolidation.
If approved, the lender will either deposit the money directly into your bank account with the expectation that you will use it to pay down the debt you are consolidating, or the lender will pay the balances for you.
It is important that this does not leave you debt-free. You are responsible for making a one-time, usually fixed, monthly payment to the lender.