Should I Consolidate my Debt? 5 Signs It Might Be Time

Jen Williamson Updated on September 11, 2019

Should you consolidate your debt? It's definitely worth considering.

If you have a lot of debt, consolidating it—that is, replacing multiple loans with one single loan, usually in the form of a personal loan—can be a great way to get out from under your financial burden once and for all. But it isn’t right for everyone.

Under the right conditions, consolidating can help you:

  • Pay off your debt faster
  • Reduce your monthly payments, and
  • Improve your credit.

Here are some signs that consolidating may be the right choice for you.

1. You sometimes forget when a bill is due 

Missing even one payment deadline can hurt your credit. And if you have multiple debts, you also have multiple payment deadlines per month—not to mention multiple balances, creditors, and late fees. It can get confusing.

If you’re finding it difficult to keep track of your monthly loan payments because they’re all going to different places at different times, consolidating with a personal loan is a simple way to fix that problem.

2. Some (or all) of your debts have high interest rates

Credit card interest rates run high. The average is about 14.4% (for existing accounts) and 19.24% for new offers. Compare that with the average personal loan interest rate, which can be as low as 7.99%  (as of September 2019).

Of course, not everyone qualifies for the lowest rates on personal loans—the average rate was right around 10.22% in 2018, according to the Federal Reserve. That's still a big break from what your credit cards may be charging you. So if your credit card interest rate is screamingly high, it might make sense to explore the possibility that you could score a lower interest rate by consolidating your credit card debts with a personal loan.

3. You're trying to improve your credit score

Consolidating your credit cards under a single loan can help you rehabilitate your credit for a number of reasons. This is especially true if you consolidate with a personal loan. Reasons include:

  • Making it easier to keep track of your bills and pay everything on time — As we said in the section above, you'll lose the confusion factor of having multiple creditors and due dates.
  • Reducing your credit card utilization ratio — Your utilization ratio is the amount of debt you have on your credit cards vs.  your credit card limits. This number is a key component of your credit score. Replace some credit card debt with personal loans, and you could lower this ratio — which can give you a boost on your credit score.
  • Diversifying your credit mix — If you have mostly one kind of debt, having a mix of different kinds can also help your credit score because it shows your ability to pay over time, in both installments and minimum monthly payments.
  • Replacing revolving debt with installment debt — Credit card debt is known as “revolving debt.” It’s the kind of debt where you continually add to your balance (by using it to buy things), and you don’t have a specific end date to pay it off as long as you make minimum payments on time. While you generally need some revolving credit to build up your credit score, having too much can pull down your score. 

    Personal loans are “installment debt”—a loan you take out once, pay off by a certain date, and don’t add to by using it to make purchases. This kind of debt is better for your credit.

 

4. You want to pay off your debt by a certain date

Replacing your credit card debt with a personal loan will give you a specific timeline for paying off your debt, and a regular monthly payment schedule to adhere to. For some people, the structure can really help in getting their debts paid off.

5. You have a plan for staying out of debt 

Consolidation isn’t a magic bullet. If you haven’t dealt with any bad spending habits that may have contributed to getting into debt in the first place, it may not help you get your debts paid off faster.

Consolidating your debt could be the best financial decision you could possibly make—but it won’t automatically fix your credit. The trick is to make your payments on time and avoid incurring more debt while you’re paying off what you have. If you can do that, you may be ready to consolidate.

Interested in consolidating your debt? Our preferred personal loan option right now comes from Citizens Bank. We like their fast approval and flexible payment options. Check them out here

Published in: Personal Loan

About the Author
Jen Williamson

Jen Williamson is a freelance writer living in Brooklyn. She has written for a variety of industries, including software, education, business, and personal finance. Prior to that, she worked at an adult literacy nonprofit in Philadelphia, where she coached nontraditional students in passing the GED test and applying for college. When she isn’t writing or reading—which is rare—she can usually be found planning her next travel adventure, training for a marathon, or sneaking in somewhere she’s not supposed to be. Read more by Jen Williamson

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