Did you know that a typical American household now holds over $130,000 in debt? Being that deep in debt could leave you feeling like you’re underwater.
You might have heard about using debt consolidation as a tool to help you get out from under some of the weight, but could be asking, “How does debt consolidation work?”
If you’re confused about debt consolidation and you need some guidance, we’re here to help. Continue through this article to learn how to consolidate debt and what happens when you do.
Table of Contents
1. Debt Consolidation Can Hurt Your Credit
One of the biggest things people ask is, “Does debt consolidation hurt credit?” The answer is that yes, it can hurt your credit, but that doesn’t necessarily mean you shouldn’t do it.
Debt consolidation companies may make a hard inquiry on your credit, and that can lower your credit. One thing to think about, though, is that if you can’t pay your debts, it is likely going to be helpful to consolidate those debts so you can stay current.
Being behind on debts is much worse than getting a single inquiry on your credit.
2. You’ll Be In Debt Longer
When you consolidate your debt, the idea is to put all of your debt together and make it where you don’t have to pay a high monthly loan payment on multiple accounts. If you have to pay too much on a lot of different accounts, then this could be a big problem.
Even if it does make sense to put all of your debts together so you can pay less per month, keep in mind that it is going to keep you in debt longer.
3. Keep an Eye Out for Variable Interest Rates
One of the ways debt consolidation can help is when you find a loan with a lower interest rate. The only problem is that if you don’t think about the fact that variable interest rates can rise, you’re likely to get taken for a ride.
Try to find companies that offer debt consolidation with interest rates that aren’t variable. You want to find companies that say their interest rates are fixed. It’s better to have a little bit higher fixed rate than a lower variable rate.
You don’t want any surprises down the road.
4. Debt Consolidation Doesn’t Eliminate Debt
One of the things many people misunderstand is that they think that debt consolidation eliminates debt. As we mentioned above, debt consolidation actually means you’ll take longer to pay off your debt.
Depending on the type of loan you get and the interest rate, you might end up paying more in the long-run. Unless you’re behind on your debt, you might want to think twice about debt consolidation.
On the other hand, if you feel like you’re drowning in debt, this could be the perfect solution.
How Does Debt Consolidation Work? – Now You Know
Now you know the answer to, “How does debt consolidation work?” Now you have more of an idea of whether or not this is going to be the best solution for you.
Do you want to learn more about debt, credit, and other financial topics? See the rest of our blog for more.