Monday, May 15, 2017
Debt consolidation: Is it right for you?
When you’re struggling to get out from under debt, any amount of payment relief can be a weight lifted off your shoulders.
When used correctly, debt consolidation can help you pay off those loan balances and free up cash flow for a brighter financial future.
“People tend to look into debt consolidation when their bills have gotten to a point where it is too hard to keep up with the payments,” says Leslie Alvarez, community outreach and education assistant at Dupaco Community Credit Union’s Williams Boulevard branch in Cedar Rapids, Iowa.
What is debt consolidation?
Debt consolidation, also known as loan consolidation, rolls multiple debts into one loan—often providing a lower interest rate, lower monthly payment and the convenience of making only one loan payment each month. Debts might include credit card balances, personal and auto loans, and mortgages.
When used correctly, debt consolidation can be instrumental in helping borrowers regain control of their debt and their budget.
How does debt consolidation work?
Debt consolidation isn’t one-size-fits-all. At Dupaco, you can request a free Money Makeover to determine whether this route makes sense for you.
“We specialize in thrift and want to make sure we are doing the best thing for the member and saving them money,” Alvarez says.
Debt consolidation might take the form of:
When does debt consolidation not work?
Debt consolidation should be avoided if it won’t save you money, Alvarez cautions.
“Sometimes people get excited thinking that life would be easier if all their debts came on just one bill, but you might be paying a higher interest rate by consolidating it,” she says. “Make sure you know what you are paying now and what you will be paying after a consolidation.”
How does debt consolidation impact credit?
The trick to getting the most out of debt consolidation is keeping your old credit cards open—and not using them, Alvarez says. If you can do this, you will increase your available capacity and improve your credit score.
“Creating a budget will help you see where you are spending and keep you on the right track,” Alvarez says.
If you start using old credit cards, you take on more debt, which can negatively impact your credit score.
“Coming into Dupaco for our Money Makeover is a great way to ensure they will improve their credit,” Alvarez says. “A big part is also for the consumer to hold themselves accountable and stick to their consolidation plan.”
By Emily Kittle