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304 North Cardinal St.
Dorchester Center, MA 02124
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Debt consolidation can be an excellent way to streamline your payments, eliminate your debt faster, and even save money along the way. However, it’s not always the best approach. It’s important to understand your situation and your goals to determine the best way to tackle your debt situation.
As you research all of your options, here are some things to keep in mind before proceeding with debt consolidation.
There are a few different ways to consolidate your debt, including a personal loan, balance transfer credit card, or debt management plan. Here’s how each option works:
A personal loan is an installment loan you can use to pay off high-interest loans and credit card balances. Repayment terms typically range from one to seven years, and interest rates can be in the single digits if you have good or excellent credit. Some lenders charge an origination fee that can be as much as 12% of the loan amount in some cases and is deducted from your loan disbursement. If your credit is in great shape, look out for lenders that don’t charge this upfront fee.
Balance transfer credit cards offer introductory 0% APR promotions, typically between 12 and 21 months, during which you can pay down a balance transferred from another credit card—and, in some cases, a loan—interest-free. Balance transfer credit cards typically charge a fee ranging from 3% to 5% of the transferred amount, which will be added to your new balance. Also, note that you may be limited on how much you can transfer based on the new card’s credit limit.
A debt management plan (DMP) involves working with a credit counselor who can negotiate a lower interest rate and monthly payment with your creditors. Repayment terms typically range from three to five years, during which time you’ll make one monthly payment to the credit counseling agency, which then distributes the money to your creditors. DMPs typically require a one-time setup fee and a monthly fee for the duration of the plan. Additionally, you may be required to close all of your associated credit card accounts and agree not to open new accounts until you complete your DMP. Closing accounts can result in damage to your credit score, so carefully consider whether the benefits of a DMP outweigh any drawbacks before choosing this route.
Depending on the type of consolidation you choose, the process can impact your credit score in different ways:
When you apply for a personal loan or credit card, the lender will typically run a hard inquiry on your credit reports, which can temporarily impact your credit score. Each new inquiry typically takes fewer than five points off your score, and the dip is often temporary.
If you open a new loan account or credit card, it can negatively impact your length of credit history, particularly by lowering the average age of your accounts. But again, the impact is typically temporary in nature.
Your credit utilization rate is the percentage of the available credit on your credit cards that you’re using at a given time. If you pay off credit card balances with a personal loan, it’ll reduce your utilization rate on those accounts to zero, which can help increase your credit score. If you use a balance transfer credit card, the impact on your credit will depend on how your utilization rate changes on both the new and old accounts. Finally, closing credit card accounts with a DMP can cause your utilization rate to spike, which can hurt your credit until you pay down the balances.
As long as you make your payments on time after consolidating, you can use the process to build your credit score over time. If you miss a payment by 30 days or more, your credit score can take a significant hit.
If you believe debt consolidation can help you tackle your debt, check your credit score before you get started to gauge your creditworthiness and potential options. Additionally, you can use Experian’s card comparison tool to get matched with personal loans and balance transfer credit cards based on your credit profile. As you execute your debt payoff strategy, continue to monitor your credit to understand how your actions impact your credit score and track your progress in building and maintaining good credit.
For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. Our team is ready to assist you with confidence and expertise.
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