To Consolidate Debt or not to Consolidate Debt?
That is the question. The answer is … most likely yes. If you have the creditworthiness to have several higher interest rate debts consolidated to a lower interest rate than it’s hard to see why it wouldn’t make sene to do. When thinking about consolidating your debt there is really only two considerations to make, will you have lower monthly payments and will you pay less interest charges over the course of your loans.
When you consolidate your debt are your monthly payments lower?
One of the main reasons people consider consolidating their debt is to lower their overall interest rate which in turn should lower the monthly payments.
When you consolidate your debt are you total interest charges lower?
You would think that by lowering your interest rate you automatically will be paying lower total interest over time however that is not always accurate. If you consolidate your debt for a lower interest rate but a longer term than you may save money on a monthly basis but over time wind up paying more in total interest charges.
Are you credit worthy to consolidate you debt?
Like we mentioned earlier if you can qualify to have higher interest rate balances combined and reduced than it almost always makes sense to consolidate your debt. However, the key is to be credit worthy. That means that your credit history is in good shape. The first thing to do to find out is check with the 3 credit bureaus and order a copy of your credit report with scores. This will give you a strong indication if it even makes sense to try to consolidate your debt. If you have really bad credit than it’s harder to consolidate your debt because the debt consolidator or new lender is going to look at you and be uncertain that if they loan you the money to pay off your other debts that you may not be able to pay off the new debt you’ve incurred with them. Put simply, if you have bad credit, you are much riskier in the eyes of creditors and even if you could consolidate your debt it may not be with lower interest rates. At that point it doesn’t make sense to consolidate your debt. So, the first thing to do is to rebuild your credit worthiness.
Here is a great calculator to help you decide if consolidating your debt make sense.
Also to take this conversation a step further it’s helpful to know that once you get out of debt you can actually have interest being paid to you. Check out our Life Calculator to see how it makes a lot more sense getting paid interest than paying it.