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I don’t often recommend debt consolidation to people. There are times that it really is the best option, and here’s when that is.
When it comes to dealing with debt, it’s not often that I recommend debt consolidation. I have done it in the past, though. I know how useful it can be, but I also know how dangerous it can be. There are some types of people who I recommend to stay clear of debt consolidation completely.
There are other ways to handle your debt. You could opt for the snowball or the avalanche method to pay off the money you owe. Either of these are better than consolidating for a lot of people.
What is debt consolidation?
When you consolidate your debt, you are taking out another loan for the total of all your individual loans. You will clear off your individual loans and credit cards, and then you have this one loan with one payment each month. It is often lower than the individual payments you would have been making.
Sounds great, right? You credit cards are freed up! You only have one monthly payment to think about.
Well, it can be good, but you have to use this method of dealing with the money you owe wisely. If you’re drawing in debt and only make minimum payments, you could find this option the best to get a fresh and more manageable start. It’s much better than bankruptcy.
You need to change your money habits
Consolidating everything could be great if you’re willing to change your spending habits with money. If you go right back to spending on your credit cards, it’s going to be a problem. Now you have the loan to pay off and you’re back to paying off the credit cards.
This is something that happened to me thanks to my ex-husband. We consolidated and everything was great until he started spending on the credit cards again. The cards had to be cut, with one of mine kept with me at all times in the event of a genuine emergency. He wasn’t (and still isn’t, but that’s another story not for me to deal with) willing to change his spending habits.
If you are willing to change, consolidating your debt could help you. It gives you a chance to minimize the amount you pay. There’s some sort of organization and you can slowly see your debt drop. If you have a loan that has no penalities should you clear it faster than initially planned, that’s even better. Put as much money as you can toward it each month.
Your credit score could take a hit
It’s worth noting that when qualifying for debt consolidation, you could see a small hit to your credit score. This is because the company will do a check on your credit score to see if you qualify for it. That shows up on your credit report.
It is a small hit, though. And it could be a worthy hit. It is crucial to understand the difference between simple vs amortized interest so that you can choose which will be the best option for your specific financial situation.
The loan actually helps to boost up your available credit, especially with your credit cards and other loans paid off. Your credit utilization goes down, showing that you are a sensible borrower. After about six months, you should see positive changes to your credit score.
On top of that, you can keep boosting your credit score. You have this set loan that you pay off, showing you can make regular payments. It is still possible to use credit cards* sensibly to boost your credit score, but let’s stay away from that for now. We’ll talk about that when you’re ready to change your money habits.
Only opt for debt consolidation as a last resort before bankruptcy becomes necessary. You want to tackle your debt without it as much as possible. If you are unable to keep up with your debt payments and they continue to accumulate, it’s time to consult bankruptcy lawyers from a chapter 13 bankruptcy law firm to help you explore your options and determine if bankruptcy is the best solution for your situation. If you decide to file for bankruptcy, a bankruptcy attorney will help you every step of the way.
MORE: What is the debt avalanche method?
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