Is debt consolidation a good idea? this question always comes to mind when you are faced with multiple debts with high interests and you are considering consolidating them into a single debt that is easier to manage with lower interest, so as to live debt free. Well, the simple answer is: it may be a good idea to consolidate your debt and it may entirely be a bad idea also; depending on the conditions stated below. I will outline the pros and cons of debt consolidation and give you the circumstance to consolidate your debt and when not to, so that you make the decision yourself.
Table of Contents
- When is debt consolidation a good idea?
What is debt consolidation?
Debt consolidation is the process of taking several debts from different companies and consolidating them into one single debt. In a nutshell, debt consolidation works as follows. You will use a company to obtain a loan for your debts so that you have one monthly payment instead of many to worry about every month. This means less time worrying about which debts need to be paid.
There are definitely times when debt consolidation is a good idea and other times when it is not. Essentially, it’s a good idea to consolidate your debt if you can lower the interest rate or make it more manageable. On the other hand, consolidating all of your credit card debt into one larger loan will probably increase your monthly payment and make it harder to pay off in a timely manner.
Depending on the state of your finances, consolidation may be able to offer you some relief. For example, if you have a number of credit cards with high variable interest rates that have been accruing over time, then consolidating them into one debt with a fixed interest rate could save you money. However, if you have a lot of low-interest credit cards that you want to keep for future use, then consolidating them into one loan could end up costing you more.
When is debt consolidation a good idea?
Debt consolidation is a good idea when either interest rates are high or the total amount of money owed is very high. Consolidating the debts reduces the interest rate and makes it easier to repay, though it may be over a longer time.
It can be an amazing way to streamline your finances, reduce the stress of having multiple bills due every month and give you the opportunity to take advantage of lower interest rates on loans or credit card balances. However, if you only have one or two bills that need taking care of then consolidating them probably isn’t worth your time.
If you have a good or excellent credit score, then consolidating your debts gives your lower interest rates but having bad credit and consolidating debts is a bad idea because you will end up with higher interest rates.
Consolidating debts helps to buy more time to repay your loans by giving you longer repayment time or giving you an annual percentage of rate, APR of 0% (for credit card balance transfer). This gives temporary relief for you to pay back your loans. The longer time may mean you have to pay more in interest overall.
Using the option of debt consolidation loans gives you a fixed interest instead of the variable interest of credit cards. You are sure of how much you need to pay monthly for a debt consolidation loan.
Debt consolidation is best used to create an affordable repayment plan for consumers who have credit card debt and can’t keep up with the minimum payments. If you have good credit and an income that can support the new payment amount, then there’s no problem with consolidating debts into one easy-to-manage plan.
Is debt consolidation a good idea?
Here are some examples of when a debt consolidation loan might be a good idea: you need time to pay off your debt, you do not have the money to make the minimum payments on each credit card, and you want peace of mind from knowing you can pay one simple monthly payment instead of juggling different due dates and balances.
Does debt consolidation affect your credit score?
Consolidating debts does not affect credit score in itself, but what happens afterward determines your credit score. If you can make timely repayments, your credit score would improve, but underpaying your debt or late payments would ultimately hurt your credit. Also, your credit may be affected when you begin opening more credit cards accounts when you are consolidating your debts.
What is the disadvantage of debt consolidation?
One major disadvantage of debt consolidation is that you end up paying more in interest because the low interest means a longer repayment time which accrues more interest overall. Another disadvantage is that the interest you may be given would depend on your credit score; with bad credit, you end up with a higher interest rate.
Is debt consolidation a good idea for credit?
Consolidating your debts into a single debt makes it easier to repay your debts and timely repayment improves your credit score; if your income can comfortably pay your new repayment loan amount, then go for it. But if you consolidate debt and fail to pay in time, it may actually hurt your credit. Without consolidation, merely having multiple, variable interest repayments per month may increase the risk of default.
Is debt consolidation a good idea if I don’t owe that much?
The decision to consolidate your debt should depend upon how much money you currently owe in total and what kind of interest rates are associated with each individual creditor. Consolidation can reduce overall monthly payments but most likely increase the length of time necessary to pay off the debt. If you don’t owe that much and your income can pay your current debts, then consolidation is not a good idea.
Dr. Brown is the founder of Jotscroll, he is a Medical Doctor, Entrepreneur, and author. Dr. Razi Brown holds a medical degree from the University of San Diego. He has invested in many startups and is currently working on his fifth book to be published in the upcoming year.