Is Debt Consolidation Right For You?

Debt consolidation is the process of combining multiple debts into one, usually with a lower interest rate. The goal is to help you pay off your debt faster, which can save you money in the long run. However, it’s important to understand the pros and cons of debt consolidation before pursuing this option.

The first step in deciding whether debt consolidation is right for you is to have a solid plan for paying off your existing debts. This should include a detailed budget and an understanding of your spending habits and financial goals.

It’s also crucial to ensure that you have enough cash flow to comfortably cover your monthly debt service. If you are unable to do so, you may need to look into alternative options for debt relief like a credit counseling program.

You should also be able to make the minimum payments on your debts, as a late payment can impact your credit scores. And you should know that borrowing a new loan, such as a debt consolidation loan, can cause your credit scores to temporarily drop. This is because a debt consolidation loan typically requires you to submit a credit application, which leads to a hard inquiry on your credit report, which can temporarily lower your credit score by 10 points or so.

However, as long as you continue making your debt payments on time, the impact of a new loan will likely be short-lived and your credit scores should rise again soon afterward. In addition, if you have good credit and qualify for a low-interest loan, debt consolidation could actually improve your credit score over the long term by adding a fixed-rate installment loan to your mix of revolving credit (credit cards), which typically counts for 35 percent of your score.

A good credit score is essential to qualifying for a debt consolidation loan, which you’ll need to provide proof of income and other supporting documentation. You can check your credit scores and reports for free through TransUnion’s CreditView(tm) Dashboard.

Debt settlement is often a last resort, and it may only make sense for people who are severely delinquent on debts. Otherwise, you’re better off focusing on establishing a repayment plan that fits your current circumstances and resources.