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Is debt consolidation worth it?

There are many forms of debt relief. The best option for you depends on your financial situation.

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After several tough years economically, many Americans are struggling with debt. According to a report by TransUnion, from the end of 2021 to the end of 2022, total credit card balances increased from $930 billion to $785 billion, and total balances from $167 billion to $222 billion.

The average borrower has $5,805 in credit card debt and $11,116 in personal debt. With the average credit card interest rate around 24% and the average personal loan rate between 6% and 10%, it’s no surprise that crime is also on the rise.

If you’re having trouble paying off your debt — or you’re paying a mountain of interest every month — Debt relief is worth considering. One of these options is debt consolidation.

In debt consolidation, you take out a loan and use the proceeds to pay off your existing credit balance. Ideally, the new loan has better terms than your current loan, helping you pay off your balance faster and potentially save money. In this article, we’ll explore when debt consolidation might be a good option for you.

Get a free savings estimate today to start exploring your debt relief options.

Is debt consolidation worth it?

There are many forms of debt relief, and the best one for you depends on your financial situation. Here are four times when it’s worth considering a merger.

You want a low interest rate

If you have one, you may be able to get a consolidation loan with a lower interest rate than what you’re paying on your current balance. This can save you money over the length of your repayments.

If you think debt consolidation could help you, explore your options here.

You want to pay off a loan

Multiple payment deadlines can make it difficult to stay on top of everything, increasing your risk of missing a payment. With consolidation, you can combine all your debts into one single payment, which makes tracking and budgeting much easier.

You want to pay off your debt quickly

With credit cards, there is no set deadline for paying off the balance. You only need to make the minimum payment each month, which does little to reduce your total balance. On the other hand, a consolidation loan has monthly payments and a fixed repayment period, which may force you to pay down your balance more aggressively than you otherwise would.

You want to improve your credit score

The more you pay off your debt, the better it is for your credit score. Additionally, consolidation can help your credit by increasing your credit utilization ratio. By opening a new line of credit and using it to pay off your other credit accounts, you bring those accounts to zero balances. This frees up more available credit than your total credit line, which can raise your score.

Other considerations

Consolidation has many advantages, but also some disadvantages. Keep these things in mind when deciding if it’s right for you:

You can pay the fee: Some consolidation loans carry fees, including loan origination fees, closing fees, and annual fees. Be sure to take these into account when weighing how much money you stand to save by consolidating.You may not qualify for a lower interest rate if: Debt consolidation results in lower interest rates only if your credit score is strong enough to qualify for the best rates. If your credit is shaky, you may end up with an interest rate that isn’t much better than your current rate. Add any fees from consolidation and your savings could be minimal or non-existent.This can temporarily damage your credit: Paying off your debt will boost your credit in the long run. But you may see a temporary ding in your score because applying for a consolidation loan initiates a difficult investigation. Hopefully, your score will recover soon as you pay off your debt. But it’s still worth considering.This only works if you can afford the new payment: Debt consolidation assumes that you have the money to pay off your debt if you can arrange better terms. But if you can’t pay much (if anything), you’re likely to miss payments on your new loan, putting you even further behind. If you are struggling to find the cash to pay off your debt, you may want to explore other debt relief options such as debt settlement or debt forgiveness.

Bottom line

You don’t have to struggle with overwhelming debt. There are ways to reduce your overall debt load and get back on track with your finances. Just be sure to weigh your options carefully and consider all the pros and cons before choosing a debt relief path to pursue.

MoneyWatch: Managing Your Money

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