If your personal finance goals include paying off outstanding debt, consolidation is one solution to consider. A debt consolidation loan allows you to combine credit card debt and other types of debt into a single personal loan.
While you could open a 0% APR balance transfer credit card
to manage debt, consolidating with personal loans can yield some advantages. For example, you can exchange a variable interest rate on credit card debt for a fixed interest rate. Reducing your interest rate can save you money over time. And when more of your monthly payment goes toward the principal, it's possible to pay down debt faster
But there are some debt consolidation myths that may be holding you back from getting a personal loan.
3 myths about debt consolidation -Here are some of the biggest misconceptions about consolidating debt, along with some tips on how to choose a debt consolidation loan.
1. It damages your credit score
- It damages your credit score
- Debt consolidation will decrease debt and save money
- It's time-consuming to consolidate debt
Maintaining a good FICO score
is important when borrowing money. The better your credit history, the easier it is to qualify for loans. It's always important to research personal loan lenders — especially if you're concerned about your credit score. Use an online marketplace like Credible to make sure you’re getting the best rate and lender for your needs.
A common myth about debt consolidation is that it will hurt your credit score. It's a fact that applying for a personal loan may require a hard inquiry of your credit report, which can trim a few points off your credit score. But over time, consolidating debt could help improve your score.
For instance, if you're using a debt consolidation loan to pay off credit card debt, you could reduce the balances on your cards to zero. This could improve your credit utilization ratio, the second-most important factor for FICO credit scoring. At the same time, making on-time payments to the personal loan you used to consolidate debt could also give your score a boost. If you're concerned about credit score impacts when paying off outstanding debt, you can use a tool like Credible to check your credit and monitor for identity theft.
2. Debt consolidation will decrease debt and save money
One of the most persistent debt consolidation myths is that it will automatically decrease your debt and save you money. Consolidating debts — whether it's student loan debt, credit cards, or other debts — doesn't by itself reduce what you owe. Instead, a debt consolidation loan provides you with the funds to pay those individual debts off. Going forward, you'd make payments toward your consolidation loan.
Debt consolidation shouldn't be confused with debt settlement, which allows you to pay off outstanding debt for less than what's owed. This option is typically only available if you're significantly behind on payments to a debt, which can cause serious credit score damage.
If your financial goals include paying off debt while maintaining a good credit score, debt consolidation is the better option. Though it's important to use a personal loan calculator to estimate your potential interest savings. You can also plug in some simple information into Credible's free online tool to determine if a debt consolidation loan is your best option.
Depending on the personal loan term, amount, and interest rate, it's possible that debt consolidation may not save you as much money as you expected. Visiting Credible can help you compare debt consolidation options to find the best personal loan rates for you, based on your credit score and credit history.
3. It's time-consuming to consolidate debt
Another misconception about using a personal loan to consolidate and pay down debt is that it's a lengthy process. In reality, it's possible to apply for personal loans for debt consolidation online and be approved very quickly.
With Credible, for instance, you can compare personal loan rates from multiple lenders
without affecting your credit score. You can then decide which loan options you're interested in, complete the application, and upload any supporting documents that are needed. Once your loan is approved, the proceeds can be used to pay off credit cards and other debts.Consider all the options for managing debt
Debt consolidation is something to consider if you have credit cards or federal student loans and you'd like to streamline your monthly payments. If you have other financial obligations, such as mortgage debt or private student loans, you could try consolidation or explore ways to refinance debt instead.
Deciding to refinance mortgage debt, for instance, could make sense if you'd like to switch from an adjustable rate to a fixed-rate loan. And you might refinance student loans to remove a cosigner or take advantage of low-interest rates. You could even choose to refinance personal loans if you have any outstanding. If you're interested in consolidating or refinancing debt, it can help to have experienced loan officers on your side.
MAGE SOURCE: PIXABAY