3. Your credit score will suffer
There are a few things that go into making a great credit score. One of them is your credit history — or how long you’ve had credit for.
It actually accounts for 15% of your overall score.
That might seem small but consider this: If you get rid of a bunch of different lines of credit at once, your credit score is going to take a huge drop. That drop gets bigger with more and more lines of credit you close.
How do you know if debt consolidation is right for you?
Debt consolidation can be a great way to plan your route out of debt. But that doesn’t mean it’s the perfect solution for everyone.
The benefits of debt consolidation are hard to argue with. You can simplify your debt, save money on interest, only deal with one creditor, and (hopefully) clear your debt faster. But there are pros and cons you need to know about before you make this decision.
It can be the best move for some, but worse for others.
Signs debt consolidation is right for you
You have high-interest debts
The number one sign that debt consolidation is a good option for you is if you have several high-interest debts. Why pay interest on several debts when you can pay it on just one?
If you know you can secure a lower interest loan, it makes sense to consolidate your debts.
According to Experian, the average personal loan interest rate is 9.41% — whereas the average interest rate for credit cards is around 16%. So, if you’ve got a ton of credit card debt, it’s worth considering debt consolidation.
You have good credit
If you’re already in debt, getting another loan might be tricky unless you have good credit. Most creditors will want a credit score of around 670 (FICO Score).
If you have good credit, you’re more likely to get approved, and also get a loan with decent interest rates. Remember, you want a loan with lower interest rates than your current debts, so this part is key. If your credit score isn’t the best, a new loan might not have favorable interest rates.
You want a fixed repayment schedule
With some debts like credit cards, it’s easy to just make the minimum payments or even miss a payment (please don’t do this). This makes it harder to clear the debt because some of it relies on willpower.
With a personal loan, you have a fixed payment and loan term that you have to abide by. This makes it much easier to stay on track and clear your debts. It also means there are no fluctuations in your monthly debt payments like with a credit card so it’s easier to budget for.
Signs debt consolidation is NOT right for you
You have a poor credit score
Having a poor credit score is one reason why a lot of people want to get out of debt as fast as possible.
However, debt consolidation relies on you not only being able to take out a new loan but also getting one without crazy high interest rates.
If the only loans you can take out mean you’ll be paying MORE in interest rates, then it’s not worth it. In this case, the only benefit would be to simplify your loans.
But what you really need is to save on interest so you can clear the debts faster.
You’re on the verge of bankruptcy
If things have taken a downward turn and creditors are threatening to sue, then a debt consolidation loan may not even be accessible to you. Bankruptcy is a scary thought, but if this is your reality, you are unlikely to qualify for a debt consolidation loan.
If this is your current situation, you would be better off looking into debt settlement to try and reduce your debt amount first.
You can’t afford the monthly repayments
Taking on another debt is tricky if you’re already in debt. While you can use this one to clear your other debts, you need to make sure you can cover the monthly repayments.
As it’ll be a higher debt amount (to cover all your other debts), the monthly repayments will be higher. Make sure that you can fit it comfortably into your budget before taking on new debt.
After all, missing repayments can set you back even further.
How to consolidate debt — and get rid of it completely
If you’re STILL interested in consolidating your debt, I want to help you.
Because there are a LOT of scammy consolidation services out there. These “businesses” will promise that they’ll help you get out of debt fast through their loan packages …
… only to screw you with hidden fees, bloated interest rates, and long loan terms.
The trick here then is to separate the good debt consolidation organizations from the bad ones.
Step 1: Find a non-profit debt consolidation firm
Non-profit debt consolidation firms are 501(c)(3) organizations that help provide you with consolidation services, credit counseling, and will even negotiate with your creditors for you.
The best part: They do so with little to no costs to you since they’re funded by third-party sources such as donations and grants.
Unfortunately, even scammers and bad consolidation services have non-profit status. So you’ll have to do your research into finding a reputable one.
Two good signs a non-profit debt consolidation firm is the real deal:
- Fees. A reputable non-profit will likely have monthly maintenance fees. Luckily, they’re relatively low cost — and if you’re in really dire straits, some non-profits will waive the fees entirely for you.
- Non-profit status. This might seem like a no-brainer but it still needs to be said: Ask them for verification of their non-profit status. Too many scam companies pretend they’re non-profits in order to lure people in. Don’t be one of those people.
Make a list of 5 to 10 non-profit debt consolidation firms. Spend the next week calling each of them and getting a consultation on your situation and what they can do for you.
A good non-profit will spend about an hour on your consultation. Beware of any organization that wants to take your money and put you into a plan right away. They are NOT looking out for your best interests.
