Is Debt Consolidation Right for You?
It’s human nature to look for the fastest, easiest and most efficient way to deal with any problem. If you’re wrestling with debt, you may wonder if debt consolidation is the fix you’ve been looking for.
Debt consolidation may be an option, but it’s not necessarily for everyone. Before you jump into a debt consolidation loan, ask yourself these four questions:
1. Is the majority of my debt unsecured?
If the bulk of what you owe is credit card debt, you’re probably paying very high interest rates. First, contact your credit card companies and ask if your rates can be lowered. If you usually pay on time and keep your balances low, you might have a good shot. But, if you’re juggling multiple high-interest debts, a debt consolidation loan could help streamline your efforts to pay down debt.
2. Will I have to leverage an appreciating asset in order to secure the loan?
Some debt – such as a mortgage – can be considered “good” because you have something to show for it. Your home is an appreciating asset, and using it as collateral for a debt consolidation loan may not be the best idea. Default on your credit card debt and you can ruin your credit score. Default on a home loan and you can lose your home.
3. Will consolidating my debt harm my credit score?
Consolidating debt may affect your ratio of credit available to credit used, especially if you close accounts after consolidating them – such as canceling a credit card once the balance is zero. The dip, however, should be temporary – unless you begin to accrue more credit card debt. This brings us to the last, key question …
4. Do I have the discipline to develop positive credit habits?
If you consolidate unsecured debt but don’t improve the spending habits that got you into debt in the first place, you run the risk of racking up even more debt on top of the consolidation loan. That route can quickly lead to disaster. It would be better to learn new credit habits first, before jumping into a consolidation loan, so you can be sure to avoid making the same mistakes down the road.
As with any major financial decision, carefully weigh each option and consider consulting with a financial advisor before making a choice right away. Check your credit report to see where you stand and to ensure there aren’t any other surprises. If your balance your credit usage well, other options might be available.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc. © 2013 ConsumerInfo.com, Inc. All rights reserved.