Should You Consider Debt Consolidation?
We all remember when we got our first credit card. Seeing your name embossed on fresh plastic under a sixteen-digit number that was created entirely for you. So shiny! From the moment you pull the sticker off and make your first real purchase, you’re suddenly in a new tier of adulting. One that comes with a whole lot of freedom... and responsibility.
So maybe you put a Europe trip on your credit card and had a grand ole time, but now you’re back. Reality sucks, doesn’t it.
Turns out there’s a few things you can do to make your debt a little easier to manage.
What is debt consolidation?
Debt consolidation is the process of rolling your debts into one payment, ideally with a lower interest rate. A debt consolidation loan means one fixed payment, one total debt owed and one interest rate instead of having multiple debts floating around.
What are the benefits of debt consolidation?
One of the main differences between a credit card and a personal loan has to do with the interest rate. A word to the wise: credit cards make money by charging usually high-interest rates and making money when you don’t pay off the full amount each month. With personal loans, the interest rate is typically lower (depending on the lender), so it may end up costing you less in the long run since you’re not accruing more debt as you go.
Additionally, you may benefit from:
• Feeling better because you’ve got less stress
• A single regular payment so you know what to expect
• A potential improvement to your credit score
• A set timeframe to become debt-free
• Cutting up your credit card, so you’re not tempted to re-spend what you’ve paid off
Which types of debt can I consolidate?
Debt consolidation is usually associated with multiple high-interest credit cards, but all unsecured debt can be consolidated. There are some instances where a secured loan, such as a car loan, can be consolidated. As always, it’s important to do your research and find the right provider for the consolidation you’re looking at.
Does debt consolidation hurt my credit score?
It’s possible that your credit score may temporarily drop since a debt consolidation loan requires a hard enquiry on your credit. However, paying off your debt and demonstrating good financial behaviours will typically improve your credit score over time. The most important thing you can do is to make your repayments and not apply for credit that you can’t afford.
But… make sure to address the real issue.
Remember, consolidating debt won’t necessarily make you debt-free long-term. Only good financial habits can do that — otherwise, you may find yourself in the same boat later down the track.
Grappling with debt can be difficult and cause financial stress for many people. If you’re struggling to manage your debt, you may want to improve your financial behaviour and start spending smarter. You might also look to technology to help you pay off debt if you need that extra push.
How do you apply for a debt consolidation loan?
Your ability to get approved for a debt consolidation loan comes down to a few factors, including your credit history. Your financial credit history provides lenders with insights into whether or not you’ll be able to meet your repayments. You can read more about how credit scores work here.
The first step is to consider your personal situation and decide if a debt consolidation loan is right for you. If you feel overwhelmed by your debt payments and think you could benefit from debt consolidation, you can get an estimate here to find out if you’re a potential candidate.
Have more questions about debt consolidation? Visit our Debt Consolidation page to learn more.