Many people choose the option of consolidating their credit card debt into one affordable loan. In many cases, debt consolidation is a smart move on several fronts. If done correctly, debt consolidation can roll multiple high-interest credits cards into one low-interest loan with one payment. Consumers also see a boost in their credit scores when they consolidate their debt. Here is a closer look at the benefits of debt consolidation.
Debt consolidation can save you big money on interest payments and save hundreds of dollars on monthly payments. With an average interest rate on credit cards hovering around 15 percent, anyone with multiple cards with high account balances are paying big bucks each month. Consolidating that debt into a low-interest personal loan or 0 percent APR credit card dramatically improves your financial standing. Debt consolidation removes the burden of making multiple debt payments each month and simplifies your monthly budget.
Debt Consolidation and Credit Scores
Consolidating your debt does more than reduce interest payments and roll all your debt into one monthly payment. Debt consolidation may help boost your credit score. Credit utilization, which is the amount of your credit card balances in relation to your credit limits, plays a critical role in calculating your credit scores. In many cases, credit utilization influences about 30 percent of your credit score. The higher your credit utilization, the lower your score.
By consolidating your credit card debt into one loan, you eliminate high credit card balances, and your credit utilization ratio drops, which in turn increases your credit score. In a nutshell, if you take out a personal loan to pay off credit cards, your credit utilization ratio drops and your credit score goes up.
However, if you take out a large personal loan to pay off your credit card debt, a large installment loan will appear on your credit report and could lower your score. In addition, the risk of debt consolidation to pay off credit cards opens the door to you adding more money to your credit cards. If you do add more debt to your credit cards, you will see an exponential drop in your credit score.
Debt consolidation offers many credit and noncredit benefits. It is up to you to decide how to use debt consolidation to your favor and improve your overall financial well-being. If you have amassed $50,000 in credit card debt, find out how it happened and look at your spending habits before you consider debt consolidation.