Tackling the
posted
May 12, 2025
in
Credit & Debt
You’ve decided to take control of your debt! But now you’re unsure about the next steps. Which repayment strategy should you choose, and what hidden details should you watch out for?
First, rest assured you’re not alone. With rising inflation and high-interest credit card rates, many Americans are in the same situation. However, before diving into action, it’s important to understand the key differences between two popular options: debt consolidation and debt management programs. Let’s take a closer look at both.
What is Debt Consolidation?
Debt consolidation involves combining multiple debts into one single loan, often with a lower interest rate. This can simplify your payments and potentially reduce the amount of interest you pay. It can provide temporary relief from juggling multiple bills and high-interest rates, but there are risks if you don’t fully understand how it works.
How Does Debt Consolidation Affect Your Credit?
When you apply for a debt consolidation loan, lenders will typically perform a hard inquiry on your credit report, which might cause a short-term dip in your credit score.
However, once you consolidate your debts into one monthly payment, managing your payments can become easier. This reduces the risk of missed payments, which can ultimately help improve your credit score.
On the other hand, if you don’t manage your consolidated debt responsibly, it can negatively affect your credit. Missing or making late payments on the new loan can hurt your credit score. Additionally, if you continue using your credit cards after consolidation, you might end up accumulating more debt, potentially putting you in a worse financial position than you were initially.
What Are the Drawbacks of Debt Consolidation?
While debt consolidation can be helpful, it comes with its own set of disadvantages that you need to consider:
Fees and Costs:
Debt consolidation loans may carry various fees, including origination fees, balance transfer fees, and closing costs (if using a home equity loan). These fees can quickly add up and reduce any savings you might gain from a lower interest rate. Be sure to account for these additional costs before deciding if debt consolidation is right for you.
Risk of Accumulating More Debt:
One of the biggest risks of debt consolidation is the temptation to take on more debt. After consolidating, you might feel like you have more financial breathing room and be tempted to spend more. This is especially risky if you consolidate credit card debt and continue using your cards, leading to even more debt than before.
Is Debt Consolidation a Good Way to Get Out of Debt?
Debt consolidation can be a helpful option for some people, but it’s not a one-size-fits-all solution. For it to work effectively, you need to address the habits and behaviors that led to the debt in the first place. In other words, consolidation may offer a temporary fix but may not be a long-term solution if the underlying issues aren’t resolved.