Once you’re at the point of being ready to address your debts, you may feel like you’re standing at a crossroads — so to speak. Should you try to come up with a plan to systematically pay down your debts on your own without help? Should you try to pursue a solution like debt settlement? Is debt consolidation the right answer for you?
It’s not always easy to know how to proceed, especially if this is your first time facing debt challenges like these. It may be helpful to think of debt consolidation as a “middle-of-the-road” solution — often more heavy duty than do-it-yourself repayment, but less extreme than settlement.
Let’s take a closer look at some scenarios that may indicate debt consolidation is right for you.
You’re Dealing with High-Interest Debts
It’s counterproductive to consolidate debts only to end up paying more in interest charges than you would have otherwise, right? So, the first sign consolidation might be beneficial to you is if you’re currently dealing with a number of high-interest debts — namely credit cards, which can easily carry annual percentage rates in the teens or even twenties.
Essentially, the debts you’re trying to get rid of should be higher than the consolidation loan you get. This brings us to our next point: the influence of credit score.
Your Credit Score Qualifies You for Low-Interest Consolidation
The leading factor in whether or not you are able to qualify for low-interest consolidation options is your credit score. Lenders look at this to get a sense of how consistently you’ve paid back debts in the past and how much credit you’re utilizing, among other factors. “Good” credit is generally considered at or above a 670 on the FICO scale — with higher scores tending to bring about better results by saving you more on interest.
Of course, it is absolutely possible to qualify for consolidation if you have a credit score under this threshold. It may be tougher to qualify for the best debt consolidation loans with the best interest terms, but a range of lenders today offer flexible options to all kinds of borrowers. The key is then determining, all factors considered — namely interest rate, amount of loan and length of loan — whether you’d be saving money by consolidating or not.
Be careful here to avoid taking on a loan that looks like it will save you money but will actually cost you more in the long run.
You Can Commit to Fixed Repayment Terms
As Experian points out, one of the biggest differences between credit cards and consolidation loans is the nature of repayment.
Credit cards are revolving debt, meaning you can borrow funds and pay them back over time as needed — and, as long as you pay the minimum or more, you will not be delinquent for doing this. This means you could hypothetically be in debt forever, although doing so would become quite expensive over time.
Personal loans, on the other hand, outline fixed repayment terms before you sign. This means you need to be able to commit to making a consistent monthly payment month in and month out until it’s paid off. Make sure your income flow can support such an approach before agreeing.
When you’re considering whether debt consolidation is the right path forward for you, start by looking at the interest rate on your outstanding debts, your credit rating and your ability to stick with consolidation repayments for years to come. If you answered yes to all these features, it’s probably worth exploring the consolidation process further. If these criteria do not fit you, trying traditional repayment or even a more drastic option, like settlement, may be a better fit.