While your total monthly payment may decrease, consolidation isn't a good option if you currently can't cover the monthly service of your debt. Debt consolidation means that your various debts, whether they are credit card bills or other loan payments, are bundled into a single loan or monthly payment. If you have multiple credit card or loan accounts, consolidation can be a way to simplify or reduce payments. If your credit score is lower than 670, debt consolidation may not be a good option for you.
Consolidating debt when you have bad credit can be a challenge. While you may be approved for a loan, the interest rates offered to you are likely to be high and may cancel out the savings you hoped to achieve by consolidating your debt. If done correctly, debt consolidation will have a positive effect on your credit. It reduces your debt and establishes a basis for consistent timely payments, which can cause your credit rating to skyrocket.
When looking for a lender, make sure you understand the real cost of each debt consolidation loan before you sign it on the dotted line. Working with a reputable credit counselor is a good way to explore debt relief options and decide what is the best way to consolidate debt for your financial situation. Just make sure that this consolidation is part of a larger plan to pay off debts and that you don't accumulate new balances on the cards you've consolidated. You want to get out of that mountain of debt, but you worry that consolidating your debts will harm your credit.
Consolidating these debts into a single loan can streamline your finances, but the strategy may not solve the underlying financial challenges. Debt consolidation can simplify payments, but it doesn't address any underlying financial habits that led to those debts in the first place. Consolidation doesn't automatically eliminate your debt, but it does provide some borrowers with the tools they need to pay what they owe more effectively. Consolidating multiple debts with a single personal loan may result in a lower rate than some of your debts, but higher than others.
There are several ways to consolidate or combine your debt into one payment, but there are a number of important things to consider before moving forward with a debt consolidation loan. Failure to pay a debt consolidation loan or any other loan can cause significant damage to your credit rating; it can also result in additional charges. However, if your credit rating isn't high enough to access the most competitive rates, you may be left with a higher rate than your current debts. Similarly, paying off credit cards and other lines of credit with a debt consolidation loan can create the illusion of having more money than you actually have.
This could mean that you'll pay much more overall, including any fees or costs of the loan that you wouldn't have had to pay if you had continued to make your other payments without consolidation.