Is Credit Consolidation Good?

To have success in using a debt consolidation loan, you must first evaluate whether or not you are completely dedicated to paying off your debt. Unless you make it a priority to dig yourself out of debt and to stop spending on your credit cards, debt consolidation may be a dangerous route. However, if you get a good interest rate on the loan and you make every effort to avoid using your credit cards, the loan may be a good answer to paying off cards with sky-high interest rates.

Definition

When you apply for credit consolidation, you are applying for a debt consolidation loan. If you are approved for the loan, it is applied toward your credit card debt and it wipes out your balances. You then make one monthly payment to the loan rather than multiple payments toward your credit cards.

Pros

If you qualify for a lower interest rate on your consolidation loan than your current credit card interest rates, then you may save money on paying back your debt. A debt consolidation loan is also beneficial for those who have difficulty keeping track of multiple payments per month, since you make one lump payment to the loan.

Cons

By applying for a credit card consolidation loan, you are allowing the consolidation company to make an inquiry into your credit report. Inquiries have a negative impact on your credit score, which may be outweighed by the positive impact of paying off your debt. However, since the debt consolidation loan wipes out your debt, people often begin spending on their credit cards again. This behavior creates more and more debt, which weighs heavily on your credit score. You must be fully committed to paying off your debt if you take on a consolidation loan.

Considerations

Oftentimes, the rates that debt consolidation companies advertise are for those individuals with very high credit scores, which you may not qualify for. It's vital to compare your current credit card interest rates with the loan interest rate to see if it's a significant enough difference for it to be beneficial to you. Also, it may be difficult to open new lines of credit because creditors will see that you have a consolidation loan, which is a red flag that you have had trouble with credit in the past.