Are you asking, “Is debt consolidation a good idea?” Read this article to understand more about debt consolidation and when it’s a good idea.
In the months since COVID-19 officially became a global pandemic, hundreds of thousands of Americans have lost their jobs or faced unpaid furloughs.
And it’s a trend that experts believe may continue, with an additional 24 percent of the nation’s employers expected to downsize in the not-so-distant-future.
With so many people facing fewer hours and reduced paychecks, many are also accumulating more debt.
Whether you recently went into debt or were struggling before COVID-19, one way to lower your monthly bill and make your payments is through debt consolidation. But is debt consolidation a good idea? Keep reading to find out.
Americans and Credit Card Debt
The average American has 4 credit cards. Whether you have more or less than the average, when debt starts to pile up, odds are that you’re making credit card payments to several cards each month. Plus, you’re also paying rent, car payments, insurance, and other monthly bills.
Credit cards are known for their high-interest rates. When you’re making multiple credit card payments each month, you might only be able to make the minimum payment.
With those high-interest rates, your debt only grows from month to month, while your small payments barely make a dent. But because you have so many bills to pay, there’s no way to break the cycle without missing a payment and incurring expensive fees.
That’s where debt consolidation comes in.
What Is Debt Consolidation?
How debt consolidation works is that various debts from different credit cards are paid off using a loan or another credit card via a transfer. Then, you make just one monthly payment towards that loan.
A credit card debt transfer and a debt consolidation loan are very different.
If you’ve been struggling with credit card debt for some time, your credit score might make it difficult to qualify for a new credit card.
While a credit check could be a factor in getting a loan for debt consolidation, with more lenders out there, this might be a better choice.
In most cases, both loans and credit cards will come in an interest rate that is only maintained for a certain period. If your debt isn’t paid by that time, the interest rate could increase. This could put you in a similar financial situation as you were when trying to pay off multiple high-interest credit cards.
Is Debt Consolidation a Good Idea?
Now that you know what it is and when it could make sense, it’s time to decide; is debt consolidation a good idea? The answer is that like any financial decision, it’s important to look at your own finances, debt, needs, and future goals.
If you’re struggling to make various debt payments each month, debt consolidation can help you lower your monthly payment without incurring penalties. But if your monthly payments are still higher than you can afford, consolidating your debt won’t help.
Instead, other debt management strategies might be a better choice.
For more tips on managing your finances or on the latest news about COVID-19, check out the rest of our blog.