Debt Consolidation

With inflation and high-interest credit card rates, many people are feeling the burden of increased debt. If you have decided it’s time to get your debt load under control, debt consolidation may be a good option. Let’s look at the pros and cons of debt consolidation.

 

What is Debt Consolidation?

 

Debt consolidation involves rolling multiple debts into a single payment, usually with a lower interest rate. This can make managing your payments easier and potentially save you money on interest.

 

How Does Debt Consolidation Affect Your Credit?

 

When you apply for a debt consolidation loan, lenders typically perform a hard inquiry on your credit report. This can cause a slight, temporary dip in your credit score. Once you consolidate your debts into one monthly payment, managing your payments becomes easier, reducing the likelihood of missed payments and benefiting your credit score.

 

On the flip side, if you don’t handle your consolidated debt responsibly, it can have adverse effects on your credit. Any missed or late payments on your consolidated loan can significantly damage your credit score and continuing to use your credit cards after consolidating could also lead to the accrual of more debt than you had originally.

 

What Are the Disadvantages of Debt Consolidation?

 

Fees and Costs

 

Debt consolidation loans can come with fees, including origination fees, balance transfer fees, and closing costs if you’re using a home equity loan. These fees can quickly add up and eat into any savings you might achieve through a lower interest rate. It’s crucial to factor these costs into your decision-making process. If you are considering consolidating debt onto a credit card, look for a card that offers no balance transfer fee, no annual fee and a low interest rate. Learn more about the credit cards offered by NE PA Credit Union, A Division of UECU.

 

Risk of Accumulating More Debt

 

One of the biggest risks with debt consolidation is accumulating more debt. After consolidating, you might feel the freedom of financial breathing room and celebrate with more spending. This is especially risky if you consolidate credit card debt and then start using those cards again, potentially ending up in a worse financial situation than before.

 

How Long Does It Take to Improve My Credit Score After Debt Consolidation?

 

The timeline for improving your credit score after debt consolidation varies based on several factors, including how well you manage your consolidated debt and your overall financial health. Typically, you may start to see improvements within a few months if you consistently make on-time payments and avoid taking on additional debt.

 

Next Steps

 

Wondering if debt consolidation is right for you? Our knowledgeable lending specialists are available to discuss debt consolidation options for your situation. Take the first step—start a Video Call or call 570-421-5585.

 

Free Debt Counseling

 

Take control of your finances, get tailored guidance and a hassle-free budgeting experience from our financial wellness partner, GreenPath, a national non-profit.

 

Source: Financial education provided by GreenPath.