Is Debt Consolidation Right For You? Things to Consider First

Debt consolidation is a tempting thought. You could have all your loans, bills, and other debt obligations reduced to one monthly payment, possibly lower than you pay now. However, debt consolidation is not right for everyone. In fact, it could work against you in the long run. Before you consolidate your debt, here are some things to consider first:

YOUR SPENDING HABITS: Before you take out a debt consolidation loan, make sure that you are ready and willing to amend your spending habits first. For example, more than 70 percent of Americans that take out a loan to consolidate debt end up with more debt than they started with in less than two years (in addition to the debt consolidation loan). These people did not amend their spending habits and ended up in a situation worse than they started with.

YOUR CREDIT SCORE: In addition, remember that debt consolidation can affect your credit score. While this will not happen if you rely on a home equity loan for your debt consolidation needs, any other form of debt consolidation will impact your credit score, in some cases severely. If you already have a low credit score, this “impact” could bring your credit score below a threshold where “good terms” meets “don’t bother.” Research your credit score and make sure you understand how your actions can impact it before you make a decision on debt consolidation.

YOUR DEBT: Depending on the debt you hold, you may have many more options than simply consolidating your debt. For instance, if you are having a hard time repaying federal student loans, spend time researching the federal Income Based Repayment (IBR) program. You may be able to pay your student loans in an amount proportionate to your income with forgiveness after 25 years (10 years if you are employed by a public service agency). Likewise, if the problem is simply that your credit card balance is out of hand, consider opening a card with a low introductory rate and transferring all you open account balances there or ask your credit card company to freeze your account for a limited time. Sometimes a loan simply is not necessary.

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