Debt consolidation can be a useful tool if you want to simplify your debt payments and perhaps reduce the amount you are paying out every month. However, it is not for everyone. If you have not addressed the reasons why you got into debt in the first place, debt consolidation makes it easier to get into more debt, which might make it more difficult for you in the long run. Before you decide to consolidate your debt, ask yourself the following questions.
Before you decide to consolidate your debt, ask yourself how you got into debt. Did you have large medical payments or legal bills? Did you spend too much on credit cards? Once you figure out what got you into debt in the first place, figure out whether you are done getting further into debt. Cut up your credit cards, or freeze them in a block of ice, so you will not be able to use them without putting a lot of thought into it. If medical or legal bills got you into debt, is the condition that got you into debt in the first place done? Can you apply for any sort of assistance with these bills? Debt consolidation works best when you are not getting yourself further into debt.
If you are having trouble paying off credit card debt, chances are, your interest rate is pretty high. You will probably benefit by getting a lower-interest consolidation loan. Your payments might be lower with a consolidation loan as well. Look at the terms very closely though. Will you be stretching out your payments over a longer period of time? If you take out a consolidation loan in order to make smaller monthly payments, but you end up paying off the loan over a longer period of time, you might end up paying more in interest. Even though your debt may be consolidated, you will still have to pay off the loan's principal.
A consolidation loan will affect your credit score to some degree. In some ways it may help. If you are having trouble balancing your bills and are consistently making late payments, you might discover that a debt consolidation loan will help your credit. If you cancel your credit card accounts after getting a consolidation loan, that could lower your credit score a bit (which is why you may want to stop using your cards but may choose to keep your accounts). The credit reporting agencies do not penalize your credit score because you have a "debt consolidation loan." The type of loan doesn't matter, as long as you are making payments on time. The other changes you make to your credit report as a result of getting a consolidation loan might affect your credit rating.